332 Accountancy joining business and consequently different types of information requirements from it. In nutshell, the various users have diverse financial information requirements from the business. For example we have classified the following into the category of internal and external users specifying their objectives and consequent information requirements. Name Internal/ External users Objective for participating in business Accounting Information requirements Current owners Internal To make investment in the business and wealth grow. Likes to know extent of profit in the last accounting period, current position of the assets/liabilities of the business. Manager Internal For a career. They essentially act as the agent of owners (their employers). Accounting information in the form of financial statements is like their report card and they are interested in information about both profits and financial position. Government External Its role is regulatory and tries to lay down the rules in the best public interest. Its concerns are that the rights of all stakeholders are protected. Since the government levies taxes on the business, they are interested in information about profitability in particular besides lot of other information. Prospective owner External He is expecting to make investments in the business with a view to make his investment and wealth grow. He is interested in information about past profits and financial position as indicative of likely future performance. Bank External Bank is interested in safty of the principal as well as the periodic return (interest). Bank is interested in adequacy of profits only as an assurance of the return of principal and interest back in time. Bank is equally concerned about the form in which the assets are held by the business. When more assets are held in cash or near cash form, the aspect is knnown as liquidity. Fig. 9.1 : Analysis of various users of accounting information 336 Accountancy The basic objectives of preparing financial statements are : (a) To present a true and fair view of the financial performance of the business; (b) To present a true and fair view of the financial position of the business; and For this purpose, the firm usually prepares the following financial statements: 1. Trading and Profit and Loss Account 2. Balance Sheet1 Trading and Profit and Loss account, also known as Income statement, shows the financial performance in the form of profit earned or loss sustained by the business. Balance Sheet shows financial position in the form of assets, liabilities and capital. These are prepared on the basis of trial balance and additional information, if any. Example 1 Observe the following trial balance of Ankit and signify correctly the various elements of accounts and you will notice that the debit balances represent either assets or expenses/ losses and the credit balance represent either equity/liabilities or revenue/gains. [This trial balance of Ankit will be used throughout the chapter to understand the process of preparation of financial statements] Trial Balance of Ankit as on March 31, 2014 Account Title L.F. Debit Amount Rs. Credit Amount Rs. Cash Capital Bank Sales Wages Creditors Salaries 10% Long term loan (raised on April 01, 2013) Furniture Commission received Rent of building Debtors Bad debts Purchases 1,000 5,000 8,000 25,000 15,000 13,000 15,500 4,500 75,000 12,000 1,25,000 15,000 5,000 5,000 1,62,000 1,62,000 1 The balance sheet and profit and loss account are now called position statement and statement of profit and loss in the company’s financial statements. Since Chapters 9 and 10 deal with the preparation of financial statements of sole proprietorship firm, the terms balance sheet and profit and loss account are retained. Financial Statements - I Commission paid 150 Office expenses 1,600 Wages 2,600 Profit on sale of investment 500 Depreciation 800 Dividend on investment 2,500 Loss on sale of old furniture 300 Closing stock (March 31, 2014) valued at Rs. 8,000 Trading and Profit and Loss Account for the year ended March 31, 2014 Dr. Cr. Expenses/Losses Amount Rs. Revenues/Gains Amount Rs. Opening stock Purchases 32,250 Less: Purchases return (250) Wages Gross profit c/d Rent 7,600 32,000 2,600 39,800 Sales 75,250 Less : Sales return (1,250) Closing stock Gross profit b/d 74,000 8,000 82,000 82,000 300 39,800 Stationary and printing 250 Salaries 3,000 Misc. expenses 200 Travelling expenses 500 Advertisement expenses 1,800 Commission paid 150 Office expenses 1,600 Depreciation 800 Operating profit c/d Loss on sale of old furniture Net Profit (transferred to capital account) 31,200 Operating profit b/d Profit on sale of investment Dividend on investment 39,800 39,800 300 33,900 31,200 500 2,500 34,200 34,200 9.6 Balance Sheet The balance sheet is a statement prepared for showing the financial position of the business summarising its assets and liabilities at a given date. The assets reflect debit balances and liabilities (including capital) reflect credit balances. It is prepared at the end of the accounting period after the trading Financial Statements - I Illustration 8 From the following balances prepare a trading and profit and loss account and balance sheet for the year ended March 31, 2014 Account Title Amount Rs. Account Title Amount Rs. Carriage on goods 8,000 Cash in hand 2,500 purchased Bank overdraft 30,000 Carriage on goods sold 3,500 Motor car 60,000 Manufacturing expenses 42,000 Drawings 8,000 Advertisement 7,000 Audit fees 2,700 Excise duty 6,000 Plant 1,53,900 Factory lighting 4,400 Repairs to plant 2,200 Debtors 80,000 Stock at the end 76,000 Creditors 61,000 Purchases less return 1,60,000 Dock and Clearing charges 5,200 Commission on purchases 2,000 Postage and Telegram 800 Incidental trade expenses 3,200 Fire Insurance Premium 3,600 Investment 30,000 Patents 12,000 Interest on investment 4,500 Income tax 24,000 Capital 1,00,000 Office expenses 7,200 Sales less return 5,20,000 Salest tax paid 12,000 Discount allowed 2,700 Discount on purchases 3,400 360 Accountancy Trading and Profit and Loss Account for the year ended March 31, 2014 Dr. Cr. Expenses/Losses Amount Rs. Revenues/Gains Amount Rs. Purchases less return Commission on purchases Carriageongoodspurchasesd Manufacturing expenses Factory lighting Dock and Clearing charges Gross profit c/d Carriage on sales Advertisement Excise duty Postage and telegram Fire Insurance premium Office expenses Audit fees Repairs to plant Incidental trading expenses Sales tax paid Discount allowed Net profit (transferred tocapital account) 1,60,0002,000 8,000 42,000 4,400 5,200 2,98,400 Sales less return Gross profit b/d Interest on investment Discount on purchases 5,20,000 5,20,000 5,20,000 3,500 7,000 6,000 800 3,600 7,200 2,700 2,200 3,200 12,000 2,700 2,55,400 2,98,400 4,500 3,400 3,06,300 3,06,300 Balance Sheet as at March 31, 2014 Liabilities Amount Rs. Assets Amount Rs. Bank overdraft Creditors Capital Add Net profit Less Drawings Less Income tax 1,00,000 2,55,400 3,55,400 (8,000) 3,47400 (24,000) 30,000 61,000 3,23,400 Cash in hand Debtors Closing stock Investment Motor car Plant Patents 2,500 80,000 76,000 30,000 60,000 1,53,900 12,000 4,14,400 4,14,400 Financial Statements - I 8. The following is the trial balance of Manju Chawla on March 31, 2014. You are required to prepare trading and profit and loss account and a balance sheet as on date : Account title Debit Amount Rs. Credit Amount Rs. Opening stock 10,000 Purchases and sales 40,000 80,000 Returns 200 600 Productive wages 6,000 Dock and Clearing charges 4,000 Donation and charity 600 Delivery van expenses 6,000 Lighting 500 Sales tax collected 1,000 Bad debts 600 Misc. incomes 6,000 Rent from tenants 2,000 Royalty 4,000 Capital 40,000 Drawings 2,000 Debtors and Creditors 6,0000 7,000 Cash 3,000 Investment 6,000 Patents 4,000 Land and Machinery 43,000 Closing stock Rs. 2,000. (Ans. Gross Profit: Rs. 18,400, Net profit: Rs. 18,700, Total balance sheet: Rs. 64,700) 9. The following is the trial balance of Mr. Deepak as on March 31, 2014. You are required to prepare trading account, profit and loss account and a balance sheet as on date : Account title Debit Account title Credit Amount Amount Rs. Rs. Drawings 36,000 Capital 2,50000 Insurance 3,000 Bills payable 3,600 General expenses 29,000 Creditors 50,000 Rent and taxes 14,400 Discount recived 10,400 Lighting (factory) 2,800 Purchases return 8,000 Travelling expenses 7,400 Sales 4,40,000 Cash in hand 12,600 Bills receivable 5,000 Financial Statements - I Closing stock as on March 31, 2014 Rs.22,000. (Ans. Gross profit Rs. 1,56,500, Net profit Rs. 1,10,300, Total balance sheet Rs.2,14,000) 15. Prepare trading and profit and loss account of M/s Sports Equipments for the year ended March 31, 2014 and balance sheet as on that date : Account Title Debit Amount Rs. Credit Amount Rs. Opening stock 50,000 Purchases and sales 3,50,000 4,21,000 Sales returns 5,000 Capital 3,00,000 Commission 4,000 Creditors 1,00,000 Bank overdraft 28,000 Cash in hand 32,000 Furniture 1,28,000 Debtors 1,40,000 Plants 60,000 Carriage on purchases 12,000 Wages 8,000 Rent 15,000 Bad debts 7,000 Drawings 24,000 Stationery 6,000 Travelling expenses 2,000 Insurance 7,000 Discount 5,000 Office expenses 2,000 Closing stock as on March 31, 2014 Rs.2,500 (Ans. Gross loss Rs. 1,500, Net loss Rs. 41,500 , Total balance sheet Rs.3,62,500) Checklist to Test Your Understanding 1. Test Your Understanding - II (i) T (ii) T (iii) F (iv) T II (i) b (ii) a (iii) e (iv) c (v) d 2. Test Your Understanding - II 1. (v) 2. (iii) 3. (iii) 4. (iii)

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