Analysis of Financial Statements

A brief analysis of the different financial statements used to show the financial position of the company or organisation.

1. ANALYSIS OF FINANCIAL STATEMENTS Presented by Neethu s jayan

2. introduction Profit and loss account is prepared in order to calculate the net loss and net profit of the business. Trial balance is a statement containing the balances of all ledger accounts as at any given date. Balance sheet is a statement which shows the financial position ie ; the balances of assets, liabilities and capital of a business at a given date.

3. BALANCE SHEET A balance sheet is usually prepared in the form of a statement , with assets on the right-hand side and liabilities and capital on the left-hand side . Such an arrangement of the items in a balance sheet is known as ‘ Marshalling’ There are two ways in which the assets and liabilities can be arranged in balance sheet . They are : ( a)Order of permanence (b)Order of liquidity

4. ( a)Order of permanence It is commonly used by companies The format of balance sheet on the basis of order of permanence are as follows.

5. Liabilities Rs Assets Rs Capital: xxx Add: Net profit xxx Add: Interest on capital xxx xxx Less: Drawings xxx Less: Interest on drawings xxx Less: Loss if any xxx Long term liabilities: Loan on mortgage Bank loan Current liabilities: Sundry creditors Bills payable Bank overdraft Creditors for outstanding expenses Income received in advance xxx xxx xxx xxx xxx xxx xxx xxx xxx Fixed assets: Goodwill Land & buildings Loose tools Furniture & fixtures Vehicles Patents Trade marks Long term loans(advances) Current assets: Closing stock Sundry debtors Bills receivable Prepaid expenses Accrued incomes Cash at bank Cash in hand Fictitious assets: Preliminary expenses Advertising expenses Underwriting commission Discount on issue of shares Discount on issue of debentures xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Xxx xxx

6. (b)Order of liquidity It is popular among sole traders & partnership firms The format of balance sheet on the basis of order of liquidity are as follows.

7. Liabilities Rs Current liabilities Fixed or Long term liabilities Liabilities to owner or owner’s funds xxx xxx xxx xxx Assets Rs Current assets Investments Fixed assets Fictitious assets xxx xxx xxx xxx xxx

8. Difference between trial balance and balance sheet DIFFERENCE TRIAL BALANCE BALANCE SHEET Meaning Objective Accounts Involved It is a statement of debit balances and credit balances taken from the ledger. It is prepared to test the arithmetical accuracy of books of account. Balances of all types of accounts that is personal, real and nominal accounts are shown. It is a statement of assets and liabilities of the business on a particular date. It is prepared to ascertain the financial position of the organization on a particular date. Balances of real and nominal accounts only are shown.

9. Preparation Stock Use Items Covered It is usually prepared at the end of each month, 3 months, 6 months or year before the preparation of trading and profit and loss account. Opening stock appear in the trial balance. It is prepared for internal use. It contain all items relating to incomes, expenses assets & liabilities. It is usually prepared at the end of the year after the preparation of trading and profit and loss account. Closing stock is shown on the asset side of the balance sheet. It is prepared for external use that is for outside parties such as government authorities, creditors, shareholders, etc. It incorporates only assets and liabilities.

10. Division Signature Filling Debit and credit columns Auditor need not to sign it It is not required to be filed to anybody. Assets and liability column Auditor must sign it It must be filed with the registrar of companies if the business is a company.

11. Difference between PROFIT & LOSS ACCOUNT and balance sheet DIFFERENCE PROFIT & LOSS A/C BALANCE SHEET Meaning Information Disclosed Time Frame Users It is an account that shows company’s revenue and expenses over a period of time. Income, expenses, gains and losses. It is an ongoing recording of the business’ revenues and expenses. It is more often used by owners and management. It is statement that shows company’s assets and liabilities at a specific date. Assets, liabilities and capital of shareholders. It is calculated on a particular date. It is more often used by investors and lenders

12. Purposes Nature Preparation It is generated to measure the net profit or net loss of business operations over a given period of time. It is an account. This account is prepared by taking closing balances from nominal account It is intended to show the financial position of a business at a particular date by revealing the value of all properties owned, the debt owed and the amount of capital ownership. It is not an account, but it is a statement. It is prepared only by taking balances of other than nominal account like personal & real.

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