Unit – 02

Financial Statements of Sole proprietorship

Introduction to Financial Statements:

Financial Statements are the statements prepared at the end of the accounting period to determine the financial
performance (i.e., profitability) and financial position of the business as on the date. It is the end-product of the
accounting process prepared from the Trial Balance.
A complete set of financial statements is known as Final Accounts which includes the following:
 An Income Statement known as Trading and Profit and Loss Account: Such a statementhas two parts
where one is the Trading Account that shows the Gross Profit or Gross Loss for the accounting period and
the other is the Statement of Profit and Loss that shows the Net Profit or Net Loss for the accounting period.
 A Position Statement known as Balance Sheet: It is a statement that shows financial position of the entity on
a particular date in form of assets held and liabilities owed.

Objectives of financial statements:

 To ascertain financial position of the business
 To ascertain profitability position of the company
 To identify the gross profit or loss
 To identify the net profit or net loss
 To facilitate comparison
 To record complete details of incomes and expense
 To facilitate calculation of ratios

Financial statements of sole- proprietorship:

01. Financial Statements of Manufacturing concern-
 Manufacturing account or statement of manufacturing
 Statement of trading and profit and loss account
02. Financial Statements of Non-Manufacturing concern-
 Trading account
 Profit and loss account
 Balance sheet

Presentation of financial statements:

01. Horizontal form
02. Vertical form

Horizontal Form:
  It presents the financial statements (i.e., Trading and Profit and Loss Account and Balance Sheet) in ‘T’ form
where the statements are divided into 2 parts as left hand side and right hand side.
 Left hand side comprises of debit items (in case of Trading and Profit and Loss Account) or Liabilities plus
Capital (in case of Balance Sheet).
 Right hand side comprises of credit items (in case of Trading and Profit and Loss Account) or Assets (in case
of Balance Sheet).

Vertical Form:
 It presents the financial statements in a single column statement.
 It does not divide the statements in parts, instead presents all the items in a single column one below the
other by categorising each of them based on an appropriate parameter.
 It presents the items in the income statement in the same sequence or flow in which the amounts are to be
derived, i.e., first the gross profit is determined, then the operating profit and then the net profit which is
then transferred to the Capital Account.
 In the Balance Sheet, all the sources of funds are listed first and then the application of funds are listed by
categorising each of them based on an appropriate parameter.

Difference between Profit and Loss Account and Balance Sheet:

Sr. Basis Profit and Loss Account Balance Sheet

no.

1 Time/Period It is prepared for a particular It is prepared on a particular date

accounting period. which is the last day of the
accounting period.

2 Purpose It is prepared to determine the It is prepared to get an idea of the

profitability of the business. financial position of the business.

3 Items Recorded It records all the incomes and It records all the assets and
expenses. liabilities.

4 Balance Its balance is transferred to the It has balances of assets and

Capital Account. liabilities which become the opening
balances of the next period.
 Difference between Balance Sheet and Trial Balance:
Sl. No Basis Trial Balance Balance Sheet
1 Meaning It is a statement that comprises of all It is a statement that comprises of all
the debit and credit balances of the the assets and liabilities of the
accounts prepared with respect to the business along with the capital of the
transactions recorded in the entity.
books of accounts.
2 Period It may be prepared for any periodof It is prepared at the end of an
time as per the requirement which can accounting period.
be monthly, quarterly,
yearly, etc.
3 Need/Purpose It is prepared to check thearithmetical
It is prepared to determine the
accuracy of the transactions [Link] position of the businesson a
particular date which is the
last day of an accounting year.
4 Presentation It has two columns namely debit and It is divided into 2 parts where the left
credit where debit and credit side comprises of Capital and
balances of the balanced accounts Liabilities and the right side
are recorded. comprises of the assets.
5 Accounts It comprises of all the accounts and It comprises of only personal and
no account can be missed to checkthe real accounts or only Assets,
arithmetic accuracy. Liabilities and Capital Accounts
6 Closing Stock Normally, it does not appear in Trial Recorded in the Balance Sheet.
Balance
6 Adjustments It can be prepared anytime without It can be prepared only after giving
making any adjustments. effect to all the adjustments.

Trading Account:
 It is the first stage of the final accounts so prepared.
 It records the transactions related to the buying and selling of goods and/or services during an accounting
period.
 It has 2 sides where the left-hand side is known as debit side and the right-hand side is called the credit side.
The debit side records items like opening stock, purchases net off returns and direct expenses and the credit
side records items like sales or services rendered and closing stock.
 It totals the debit and credit sides to determine if there is any difference. If the debit side total is greater than the
credit side total then it is termed as Gross Loss and if the credit side total is greater than the debit side total then it
is termed as Gross Profit.
Profit and Loss Account
 It is prepared after preparing the Trading Account for a particular period.
 It determines the net profit earned or loss incurred by the business during an accounting period.
 It starts with the Gross Profit or Gross Loss that is computed by balancing the Trading Account.
 All the indirect incomes and gains are credited to the Profit and Loss Account and all theindirect
expenses and losses are debited to the Profit and Loss Account. Difference between the debit and credit side
determines the Net Profit or Net Loss.
 TRADING ACCOUNT for the year ended ………..(Horizontal form)
Dr. Cr.
Amount Amount
Particula Rs. Particulars Rs.
rs
To Opening Stock … By Sales
To Purchases ... Less: Returns (Returns Inward) …
Less: Returns (Returns Outward) … … By Scrap Sales …
To Wages and Salaries or Wages … By Closing Stock …
To Gas, Fuel and Power … By Gross Loss (if any) …
To Carriage on Purchases/Carriage transferred to P and L
inwards/Carriage … A/c(Balancing Figure)
To Freight, Octroi and Cartage …
To Manufacturing Expenses …
To Gross Profit (if any)
transferred to P and L A/c …
(Balancing Figure)
… …

PROFIT AND LOSS A/c as on……….. (Horizontal form)

Dr. Cr.
Particulars Amount Particulars Amount
To Gross Loss b/d By Gross Profit b/d
(Transferred from Trading A/c) … (Transferred from Trading A/c) …
To Salaries … By Rent from Tenant …
To Rent, Rates and Taxes … By Discount received …
To Printing and Stationary
To Lighting … By Dividend on Shares …
To Travelling Expenses … By Interest on Investments …
To Insurance … By Commission Received …
To Legal Charges … Bad-Debts Recovered Sources …
To Audit Fees … By Miscellaneous Receipts …
To Telephone Charges … By Profit on Sale of Assets …
… By Net Loss (if any) transferred …
To Postage and Telegram … to Capital A/c
To General Expenses …
To Advertisement …
To Bad-debts …
To Packing Charges …
To Delivery Van Expenses …
To Commission …
To Depreciation …
To Bank Charges …
To Loss on Sale of Assets …
To Net Profit transferred to Capital A/C
……. …….
Operating Profit and Net Profit:

Operating Profit: It is the amount of profit earned through the normal operating activities of the business
and is computed by deducting the Operating Expenses from the Gross Profit.

 Net Profit: It is the amount of profit earned through the operating and non-operating activities ofthe
business. It is the excess of revenue (operating + non-operating) over expenses and losses (operating +
non-operating).

 Operating Expenses: These are the amounts of expenses incurred by an enterprise that are associated
with its operating activities and therefore, cost of goods sold besides salaries to staff in purchase
departments, store electricity bill, salaries to sale staff or accountants, etc. are operating expenses.
Expenses like rent, repairs, depreciation, etc. are operating expenses because without such expense the
enterprise cannot carry out its operating activities. All of these expenses are debited to the Profit and Loss
Account.

 Non-Operating Expenses: These are the amounts of expenses which do not relate to the main activity of
the enterprise such as donation, loss on sale of fixed assets or loss by fire, etc. Such non-operating expenses
are also debited to the Profit and Loss Account.

 Operating Incomes: These are the incomes earned by an enterprise that are associated with its operating
activities and also includes incomes earned while carrying out operating activities, say, cash discount
received, commission received, etc. All these are recorded on the credit side of the Profit and Loss
Account.

 Non-Operating Incomes: These are the incomes which do not relate to the main operating activities of
the enterprise such as interest, gain on sale of fixed assets, etc. All of these expenses are recorded on the
credit side of the Profit and Loss Account.
Note: It is important to know the following equation in order to understand the relationship of all theabove
items:
Operating Profit = Net Sales - Operating Cost OR
Operating Profit = Gross Profit - Operating Expenses OR
Operating Profit = Net Profit + Non-Operating Expenses -Non-Operating Incomes
 Format of Financial Statements in a Vertical Form
Statement of manufacturing for the year ended 31st March…..
particulars notes Amount Amount
Opening stock of Raw Materials xxx
Purchase of raw material xxx
Carriage Inwards xxx
xxx xxx
Less: Closing Stock of Raw Material xxx
Direct wages xxx
Direct expenses xxx xxx
Prime Cost – xxx
Add: Factory Expenses xxx
Indirect Wages xxx
Factory Rent xxx
Factory Insurance xxx
Factory Fuel and Power xxx
Depreciation of Plant & machinery xxx
Other factory Expenses xxx xxx
Factory Manufacturing Cost xxx
Add: Opening work-in-progress xxx
xxx
Less: Closing Work-in-progress xxx
xxxx
Cost of Production -

Statement of Trading account for the year ended 31st March…..

particulars Note Amount Amount
Net sales Revenue
(Sales – Sales returns) xxxx
Less: Cost of goods sold
Opening Stock xxx
(+) Net Purchases(Purchases–Purchase returns) xxx
(+)Direct Expenses
Carriage Inwards xxx
Freight Charges xxx
Wages xxx
Manufacturing or Factory Expenses xxx
Custom duty or clearing charges xxx
Coal, Gas, Power and Fuel xxx
Cost of goods available for sale xxx
Less: Closing Stock xxx xxx
Gross Profit or Gross Loss xxx
Statement of Profit and Loss account for the year ended 31st March….

Particulars Note Amount Amount

Gross profit/ Gross Loss Xxx
Less: Operating expenses
Administrative Expenses
Salaries xxx
Rent, Rates and Taxes xxx
Printing and Stationary xxx
Postage and Telegrams xxx
Repairs and maintenance xxx
Insurance xxx
Audit Fees xxx
Legal Charges xxx
Bank charges xxx
Depreciation xxx
Miscellaneous Expenses xxx

Selling and Distribution Expenses

Trade Expenses xxx
Advertising xxx
Carriage outwards xxx
Travelling expenses xxx
Commission paid xxx
Discount allowed xxx
Entertainment expenses xxx
Bad debts xxx
Add: new reserves for bad debts xxx
xxx
Less : old reserves for bad debts -xxx xxx
Reserve for discount on debtors xxx (-)xxx
xxx
Add : operating Income
xxx
Commission received
xxx
Discount received
xxx
Appreciation of assets
xxx
Reserves for discount on creditors
xxx (+)xxx
Miscellaneous income
xxx
Operating profit
Add: Non-Operating Income
xxx
Rent received
xxx
Interest received
xxx
Interest on drawings
xxx
Profit on sale of assets
xxx (+)xxx
Interest on Investment
xxx
Less: Non-Operating Expenses
Interest on capital xxx
xxx
Loss on sale of asset
Interest paid xxx (-)xxx
Net Profit/Net Loss(Transferred to capital A/C) XXXX
Vertical Balance Sheet for the year ended 31st March …..
Particulars Amount Amount
Capital and Liabilities:
Owner’s fund – capital xxx
Additional Capital xxx
Interest on capital xxx
Current Year Net Profit (+)xxx
xxx xxx
Less: Drawings (-)xxx
Interest on drawings (-)xxx
Net Loss (-)xxx xxx

Non-Current Liability
Long term debts (secured and unsecured loans) xxx
Current liabilities xxx
Sundry creditors xxx
Bills payable xxx
Bank overdraft xxx
Accrued expenses xxx
Income received in advance (+) xxx xxx
Outstanding expenses

Total liabilities xxxx

Assets:
Fixed Assets
Tangible assets - Furniture and Fixtures xxx
Plant and machinery xxx
Land and building xxx
Intangible assets – Goodwill xxx
Patents/copyrights xxx xxx
Investments xxx
Current assets: Stock /Inventory xxx
Sundry Debtors xxx
Bills Receivables xxx
Cash in hand xxx
Cash at bank xxx
Prepaid expenses xxx
Accrued income xxx xxx

Total Assets XXXX