Class 11 Accountancy Chapter 9 Financial Statements I
NCERT Notes for Class 11 Accountancy Chapter 9 Financial Statements I, (Accountancy) exam are Students are taught thru NCERT books in some of state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students prepare for evaluation. Students need to clear up those exercises very well because the questions withinside the very last asked from those.
Sometimes, students get stuck withinside the exercises and are not able to clear up all of the questions. To assist students, solve all of the questions and maintain their studies without a doubt, we have provided step by step NCERT Notes for the students for all classes. These answers will similarly help students in scoring better marks with the assist of properly illustrated Notes as a way to similarly assist the students and answering the questions right.
NCERT Notes for Class 11 Accountancy Chapter 9 Financial Statements I
Class 11 Accountancy Chapter 9 Financial Statements I
Financial Statements – I
Whenever payments are made for a purpose other than the settlement of an existing liability is called expenditure. The benefit of an expenditure may extend up to one accounting year is termed as revenue expenditure. Eg. Payment of salary, rent etc. the benefit of an expenditure extends more than one accounting period is termed as capital expenditure.
Distinction between capital expenditure and revenue expenditure
- Capital expenditure increases earning capacity of business whereas revenue expenditure is incurred to maintain the earning capacity.
- Capital expenditure is incurred to acquire fixed assets for operation of business whereas revenue expenditure is incurred on day-to-day conduct of business.
- Revenue expenditure is generally recurring expenditure and capital expenditure is non-recurring by nature.
- Capital expenditure benefits more than one accounting year whereas revenue expenditure normally benefits one accounting year.
- Capital expenditure is recorded in balance sheet whereas revenue expenditure is transferred to trading and profit and loss account.
Deferred revenue expenditure
Revenue expenditure which are likely to give benefit for more than one accounting period are treated as deferred revenue expenditure. E.g. Advertisement expense.
If the receipts imply an obligation to return the money are called capital receipts. Eg. Additional capital introduced, loan from the bank, sale of fixed asset etc. if a receipt does not incur an obligation to return the money or is not in the form of a sale of fixed asset is termed as revenue receipts. Eg. Sales, interest received etc.
Financial statements are reports prepared by a company’s management to present the financial performance (operating result) and position at a point in time. Financial statements are the main source of financial information for most decision makers. The basic objective of preparing financial statements is
1- To present a true and fair view of the financial performance of the business,
2- To present a true and fair view of the financial position of the business.
Financial statements are
- Trading and Profit and loss account / income statement
- Balance sheet / position statement
Profit and loss account is prepared to find out the operating result and balance sheet is prepared to find out the financial position
Income statement is prepared to ascertain the profit or loss of a business during a period of time. Profit or loss is worked out in three stages
- Gross profit or gross loss
- Net profit or net loss
- Operating profit or operating loss
The income statement is divided in to two sections. The first section is called trading account and the second section is called profit and loss account. Trading account reveals the gross profit and profit and loss account shows the net profit. Operating profit is calculated separately which is not necessary for final accounts. It is prepared for guiding management in various business decisions.
Trading account is an income statement prepared to ascertain trading result i.e., gross profit or gross loss.
Gross profit / Gross loss
The profit arising out of trading alone is called gross profit and if there is a loss it is called gross loss. Gross profit is the excess of net sales over cost of goods sold. Net sales means sales minus sales return. Cost of goods sold means opening stock plus net purchase plus direct expense minus closing stock. Net purchase means purchase minus purchase return.
Gross profit = net sales – cost of goods sold.
Net sales = sales – sales return.
Cost of goods sold = opening stock + net purchase + direct expense + closing stock.
Net purchase = purchase – purchase return.
Gross loss = Cost of goods sold – Net sales
All expense directly associated with the purchase or production is called direct expense.
Net profit is the ultimate profit arrived at after charging all business expenses. If the revenue exceeds the expense it is net profit and expense exceeds the revenue it is net loss.
Net profit = Gross profit + Other Income-Indirect Expense
Net profit = Operating profit – Non operating Expense + Non-Operating Income
- A non-operating expense is an expense incurred by an organization that does not relate to its main activity.
- It include loss due to fire, loss on sale of fixed asset, interest tax etc.
- Non-operating income is gains from sources not related to the typical activities of the business or organization.
- It include gain on sale of fixed asset, interest received on investment, commission received, rent received etc.
Operating profit (EBIT)
- Operating profit is the profit earned during a particular period which has resulted from routine business activities.
- It is the excess of operating revenue over operating expenses.
- Operating profit is the earnings before interest and tax (EBIT)
Operating expenses are those expenses which affect the normal course of business operation. Operating income is income accruing to a business from its normal course of action.
Operating profit = gross profit – operating expenses
Operating profit = Net profit + Non-operating expense – non operating income.
Profit and loss account
In order to find out the net result of the business, i.e. net profit or net loss, profit and loss account is prepared.
Purpose and importance of profit and loss account
- To ascertain net profit or net loss
- To compare actual performance with desired performance
- To calculate different ratios.
- To determine future line of action.
Preparation of trading and profit and loss account Closing entries
Closing entries are the journal entries passed for transferring the balances of expenses and revenues accounts to the trading and profit and loss account
Entries to close Opening stock account, purchase account, direct expense accounts
Format of trading and profit and loss account
TRADING AND PROFIT AND LOSS ACCOUNT OF MR……… FOR THE YEAR
Less- Returns xxx
Less- Returns xxx
Carriage / Carriage Inward
G/P Transferred to P/L Account
G/P Transferred from trading account
Rent Rates and Tax
Provision for discount on creditors
Interest on Drawings
Provision for discount on debtors
Interest on Capital
Printing and Stationery
N/P Transferred to Capital
- A balance sheet is a statement of asset and liabilities of a business.
- Prepared with a view to ascertain the financial position of the business as on a particular date.
- A balance sheet has two sides the left hand side and the right hand side.
- Accounts of capital and liabilities are shown on the left hand side known as liabilities side.
- Asset and other debit balances are shown on the right hand side called asset side.
- Items which are generally included in a balance sheet are.
Current assets are those assets which are either in the form of cash or which can be converted in to cash with in a year. They include
- Cash in hand
- Cash at bank
- Bills receivable
- Sundry debtors
- Closing stock
- Prepaid expenses
- Accrued income etc.
2. Fixed asset
Those assets which are acquired and held permanently in the business and are used for earning revenue.
- Land and building
- Furniture and fixtures
- Plant and machinery
- Vehicle etc.
3. Current liabilities
Liabilities that are to be settled with in a period of time of one year are called current or short term liabilities.
- Sundry creditors
- Bills payable
- Outstanding expenses
- Bank overdraft etc.
4. Long term liabilities
Liabilities that are to be settled by after one year are called long term or fixed liabilities.
It represents the amount originally contributed by the owner.
Grouping or marshalling
The arrangements of assets and liabilities in certain groups and in a particular order is called grouping and marshalling of balance sheet. Assets and liabilities can be arranged in to two ways.
- In the order of liquidity
- In the order of permanence
In the order of liquidity
In this method the assets are arranged in the order of their liquidity. Liquidity means the capacity to create cash. The assets which can be easily converted in to cash are stated first followed by other assets which cannot be so easily converted in to cash and liabilities are arranged in the order they are to be discharged.
In the order of permanence
In this method assets which are to be used for long term in the business and are not meant for sale are presented first. Liabilities which have to be discharged last are shown first and those which have to be discharged first are shown last.
Format of Balance Sheet In the order of liquidity
BALANCE SHEET OF MR…….. AS ON …………………….
Cash in Hand
Cash at Bank
Income received in advance
Add- N/P xxxx
Add- Interest on capital xxxx
Less -Drawings xxxx
Less- interest on drawings xxxx
Land and building
Plant and achinery
xxxx xxxx xxxx