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>, , 1), , 2), , 3), , FINANCIAL STATEMENTS-1, , Financial Statements, , The financial statement provides a summary of the accounts of a business enterprise., Financial statement include two statements include two statements:, 1) ‘Trading and Profit and Loss Account or Income Statement’ (To Know Profit or, loss)., 2) Balance Sheet (To know value of assets and liabilities on the closing date of an, , accounting period)., , Financial statements include the following statements:, , Income statement (Trading and Profit and Loss Account)—prepared to ascertain gross, profit/loss and net profit/loss during an accounting period., , Statement of Financial Position (Balance Sheet)—prepared to ascertain position (assets,, liabilities and capital) of an enterprise at a particular point of time., , Schedules and notes forming part of Balance sheet and Income statement —to give, , details of various items shown in both the statements., , Capital Expenditure, , The non-recurring expenditure whose benefit is derived by the business for more than a, year is called Capital Expenditure., , It includes the amount spent or liabilities incurred to acquire or improve any fixed asset, or acquiring any legal rights or first-time expenses incurred to make fixed assets, workable e.g. purchase of machinery/building/furniture etc., expenses incurred to acquire, Patents, Trademarks etc. and expenditure incurred for making an asset ready to use (like, , installation exp., carriage, first time expenses incurred on second hand fixed asset for, , www.vedantu.com 1

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making it ready to use). Capital expenditures are recorded on the assets side of the, , Balance sheet., , Revenue Expenditure, , The recurring and routine nature expenditures which are incurred for operating the, business smoothly and which help to maintain business’s earning capacity, are called, Revenue expenditures., , E.g. expenses incurred for producing finished goods such as direct expenses, purchase of, raw material and other expenses as rent, salary, repairs etc. The benefit of these expenses, last upto one year (give benefit up to one year). These expenses are shown on Debit side, , of the income statement (trading and profit and loss account)., , Capital Receipt, , Capital receipts are those irregular receipts that don’t affect profit or loss of the business;, it either increases the liabilities (raising of loans) or reduces the fixed assets (sale of fixed, assets), so they will be shown in the balance sheet. Capital receipts are not made, , available for distribution as profit to the owner., , Revenue Receipt, , Revenue receipts are received in the normal and regular course of business like Receipts, from sale of goods and rendering services to customers. Income from non-operating, business activities like income from investment i.e. interest and dividend received and, rent received, Commission and other fees received for non-operating business etc. These, receipts increases profit and are shown on the credit side of the Trading and Profit and, , Loss account., , Trading and Profit and Loss Account, , Trading and Profit and Loss account is prepared to determine the profit earned or loss, sustained by the business enterprise during the accounting period. It is basically a, summary of revenues and expenses of the business and calculates the net figure termed as, , profit or loss., , www.vedantu.com 2

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e Relevant Items in Trading and Profit and Loss Account, , A. Items on the debit side, 1) Opening stock: It is the stock of goods in hand at the beginning of the, , 2), , 3), , 4), , 5), , 6), , 7), , 8), , accounting year., , Purchases less returns: Goods, which have been bought for resale appears as, , purchases on the debit side of the trading account., , Wages: Wages refer to renumeration paid to workers who are directly engaged, , in factory for loading, unloading and production of goods and are debited to, , trading account., , Carriage inwards/Freight inwards: These expenses are the items of transport, , expenses, which are incurred on bringing materials/goods purchased to the place, , of business., , Fuel/Water/Power/Gas: These items are used in the production process and, , hence are part of expenses., , Packaging material and Packing charges: Cost of packaging material used in, , the product are direct expenses as it refers to small containers which form part of, , goods sold., , Salaries: These include salaries paid to the administration, godown and, , warehouse staff for the services rendered by them for running the business., , Rent paid: These include office and godown rent, municipal rates and taxes,, , factory rent, rates and taxes.

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9) Interest paid: Interest paid on loans, bank overdraft, renewal of bills of, , exchange, etc. is an expense and is debited to profit and loss account., , 10) Commission paid: Commission paid or payable on business transactions, , undertaken through the agents is an item of expense and is debited to profit and, , loss account., , 11) Repairs: Repairs and small renewals/ replacements relating to plant and, , machinery, furniture, fixtures, fittings, etc., , 12) Miscellaneous expenses: Though expenses are classified and booked under, , different heads, but certain expenses being of small amount clubbed together and, , are called miscellaneous expenses., , B. Items on the credit side, , 1) Sales less returns: Sales account in trial balance shows gross total sales (cash as, , well as credit) made during the year., , 2) Other incomes: Besides salaries and other gains and incomes are also recorded in, the profit and loss account. Examples of such incomes are rent received, dividend, , received, interest received, discount received, commission received, etc., , A format trading and profit and loss account., , Trading and Profit and Loss Account of ABC, , for the year ended March 31, 2017, Dr. Cr., , , , Expenses/Losses Amount Rs. | Revenues/Gains Amount Rs., , , , Opening stock Sales

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> Concept of Gross Profit and Net Profit, , , , Purchases, Wages, Carriage inwards, , Freight inwards/cartage, , , , , , , , , , , , , , , , Gross profit c/d, Gross loss b/d, XXX XXX, Rent/rates and taxes Gross loss c/d, Salaries Gross profit b/d, Repairs and renewals Interest received, Bad debts, Net profit (transferred to, capital account) Net loss, XXX XXX, , , , Gross Profit, , The excess of sales over purchases and direct expenses is called gross profit. If the, , amount of purchases including direct expenses is more than the sales revenue, the, , resultant figure is ‘gross loss’. The computation of gross profit can be shown in the form, , of equation as:, , Gross Profit = Sales — (Purchases + Direct Expenses), , The gross profit or the gross loss is transferred to profit and loss account., , Net Profit, , If the total of the credit side of the profit and loss account is more than the total of the, , debit side, the difference is the ‘net profit’ for the period of which it is being prepared.