Financial statements class 11

Meaning of Financial statements class 11
Financial statement is the last step or end product of the accounting process. Financial statements mean such documents or statements in which the related financial information is described. Mainly two details are included under financial statements: (1) Income Statement, (2) Balance Sheet.

In the word of Jon N Myer. “The financial statement summarises the accounts of the business concerns and the income statement reflects the activities of a given period of time.” Financial statements can be prepared quarterly, half-yearly or annually

In the case of a sole proprietorship, the following are included in the financial statements:

1. Trading Account — It shows the gross profit or gross loss of a business enterprise for a particular period.

2. Profit and Loss Account — It shows the net profit or net loss of the business activities of the business enterprise for the accounting period.

3. Balance sheet — The balance sheet shows the financial position of the business (i.e. assets and liability) shows.

Thus these details are also called the final accounts of the business.

The following are included in the financial statements of the company

(1) Statement of Profit-Loss or Profit-Loss Account (Profit & Loss Statement or Profit & Loss Account) It is also called Income Statement.

(2) Balance Sheet and if required

(3) Cash Flow Statement, if required, with supporting comments.

1. Financialstatementsclass11
MeaningofFinancialstatementsclass11
Financialstatementisthelaststeporendproductoftheaccountingprocess.Financial
statementsmeansuchdocumentsorstatementsinwhichtherelatedfinancialinformationis
described.Mainlytwodetailsareincludedunderfinancialstatements:(1)IncomeStatement,
(2)BalanceSheet.
InthewordsofJonNMyer.“Thefinancialstatementsummarisestheaccountsofthe
businessconcernsandtheincomestatementreflectstheactivitiesofagivenperiodoftime.”
Financialstatementscanbepreparedquarterly,half-yearlyorannually
Inthecaseofasoleproprietorship,thefollowingareincludedinthefinancialstatements:
1.TradingAccount—Itshowsthegrossprofitorgrosslossofabusinessenterprisefora
particularperiod.
2.ProfitandLossAccount—Itshowsthenetprofitornetlossofthebusinessactivitiesof
thebusinessenterprisefortheaccountingperiod.
3.Balancesheet—Thebalancesheetshowsthefinancialpositionofthebusiness(i.e.
assetsandliability)shows.
Thusthesedetailsarealsocalledthefinalaccountsofthebusiness.
Thefollowingareincludedinthefinancialstatementsofthecompany
(1)StatementofProfit-LossorProfit-LossAccount(Profit&LossStatementorProfit&Loss
Account)ItisalsocalledIncomeStatement.
(2)BalanceSheetandifrequired
(3)CashFlowStatement,ifrequired,withsupportingcomments.
Thusthesedetailsarealsocalledthefinalaccountsofthebusiness.

2. Thepurposeofaccountingisthebusinessresultsforaparticularperiod;Forexample,to
findouttheprofit-lossandtogetinformationabouttheeconomicorfinancialconditionofthe
businessattheendoftheyear.Tofulfilltheseobjectives,theaccountsandstatements
whicharepreparedattheendoftheaccountingyeararecalledFinalAccounts.Inthisway,
theaccountswhicharepreparedfordrawingannualconclusionsandforascertaining
profit-lossandbusinesspositionarecalledfinalaccounts.
AccordingtoPicklesandDunkerley,“Finalaccountsinclude(a)TradingAccount,(b)Profit
&LossAccount,(c)Profit&LossAppropriationAccount,and(d)balancesheet.
ObjectivesofFinancialStatements
Todeterminetheprofitorlossearnedbythebusinessfirminagivenperiodandto
determineitsfinancialpositionatagivenpointoftimeisconsideredasthefirstobjectiveof
financialstatements.Thevariousobjectivesandimportanceoffinancialstatements,inbrief,
areasfollows
1.Providingfinancialdataaboutfinancialresourcesandliabilitiesoftheorganisation.
2.ProvidingstatisticsofOperatingProfitsandNetProfitsoftheorganisationandtheir
financialstatusshowsaneffectontheirfinancialposition.
3.Toprovideadequateandreliableinformationtothepartiesinterestedinthefinancial
statements.
4.Torevealthetrueandfairviewoftheeconomicconditionofthebusiness.
5.Topresentthebasisforfutureactivities.
6.Providingassistanceinbusinessmanagement.
7.Tobehelpfulincomparativeanalysis.

3. ImportanceofFinancialStatement
Followingaretheimportanceoffinancialstatements:
(1)Financialstatementshelpindeterminingthecostofgoodssoldor‘costofsales’.
(2)Thereisconvenienceinfindingoutgrossprofitandnetprofitornetloss.Thisshowsthe
income-earningcapacityoftheinstitution.
(3)Thebalancesheet(whichisanimportantpartofthefinancialstatements)showsthe
financialpositionofthebusiness.Iftheassetsaremorethantheexternalliabilities,thenitis
understoodthatthefinancialpositionofthebusinessisstrong.
(4)Knowledgeofcapitalisobtainedfromfinancialstatements.
(5.)Financialstatementshelpincomparingtheprofitofthecurrentyearwiththeprofitofthe
previousyear.
(6.)Variousitemsofthebalancesheetcanbecomparedwiththefiguresoftheprevious
yeartoassessthechangesinthefinancialposition.
(7.)Financialstatementscanbeusedtoforecastthefutureofthebusiness.
(8.)Canbepresentedasevidencetothetaxauthorities.
UsersofFinancialstatements
Financialstatementsprovidefinancialinformationtoavarietyofinterestgroups(users)ina
businessentity.Theimportantusersoffinancialstatementsandtheirutilityoffinancial
statementsareasfollows:

4. (1).Owners/Shareholders—Theownersorshareholdersofthebusinessareinterested
intheprogressandwelfareofthebusiness.Theywanttoknowtheprofitabilityandfinancial
soundnessofthebusinesssothattheycantakeappropriatedecisions.Therefore,the
ownersorshareholdersofthebusinessanalysethefinancialstatementstoassessthe
currentandfutureprofitearningpotentialandfutureprospects.
(2).Management—Managersareresponsibletotheowneroftheorganisation.Theirmain
functionistoruntheenterpriseefficientlyandtakedecisions.Managementneedsfinancial
statementsforpolicymaking.Throughthefinancialstatements,theyevaluatethemselves
andtheirmanagerialknowledge.Infact,financialstatementsarethebasisofmanagerial
financialpolicy,planningandcontrol.
(3).BankersandotherFinancialInstitutionsInvestors—Banksandotherfinancial
institutionsactasinvestors.Theseinstitutionsareinterestedinfinancialanalysis.These
institutionsanalysetheprofitearningcapacityandfinancialconditionoftheinstitutiononthe
basisofaccountingstatementsbeforegivingloans,sothattheloansgivenbythemcanbe
safe.
(4).GovernmentorRegulatoryAuthority—Governmentorregulatoryauthoritiesalsouse
thefinancialstatementsofvariousindustriesandbusinessentities.Thegovernmentstudies
thefinancialstatementsfromthispointofview,sothatitcanknowwhetherthebusiness
organisationsareinprogressornot,whethertheconstructionofthefinancialstatementsis
legalandregularornot.Thetaxauthoritiesusethefinancialstatementstodetermine
incometaxandsalestax,etc.
(5).Creditors—Creditorsareoftwotypes–Short-termCreditorsandLong-termCreditors.
Short-termcreditorsareinterestedintheshort-termpositionofthebusiness.Theyget
informationabouttheliquidityofthebusinessbyanalysingthefinancialstatements.They
wanttoknowwhethertheywillbeabletopayforthegoodssoldbythemontimeornot.
Long-termlenderswanttostudywhether
(i)thefirmwillbeabletomakeregularinterestpaymentsonlong-termloans,and
(ii)whetheritwillbeabletopaytheloanswhentheybecomedue.
(6).Employees—Onthebasisofthefinancialstatements,theemployeesofthe
organisationcandecidehowmuchbonusorotherfacilitieswillbeavailablefromthebenefits
oftheorganisationandhowmuchincreaseinwagesandsalaryispossible.
(7).OtherUsers—Therearealsosomeotherusersoffinancialstatements,suchas
professionalassociations,consumerassociations,researchersorresearchers,etc.
PreparationofFinancialStatements
Thefinancialstatementsorfinalaccountsarepreparedfromthebalancesofvarious
accountsshowninthebalancesheet.Inthebalancesheet,theloanbalance(debitbalance)
andcreditbalance(creditbalance)ofvariousaccountsoftheledgerareshown.Final
accountsarepreparedfromtrialbalance.Thegeneralruleisthattheitemsshowninthetrial

5. balanceareshowninonlyoneofthetradingaccountsorprofitandlossaccountsorthe
balancesheet,asperrules.
Theitemsinthedebitbalanceoftrialbalanceareeither(i)assetsor(ii)revenueexpenses.
Revenueexpenses(i.e.itemswithdebitbalance)areshownonthedebitsideofaTrading
AccountorProfitandLossAccount.Capitalitems(suchasmachinery,land,building,etc.)
andothercurrentassetswhichhavedebitbalancesareshownontheassetssideofthe
balancesheet.
Thebalancesoftrialbalancerepresent:
(i)CapitalandLiabilities,
(ii)ProvisionandReserves,and
(iii)RevenueReceiptsandGains.Ofthese,capitalandliabilityareshownonthelefthand
sideofthebalancesheet.Reservesandprovisionsarealsoshownontheliabilityside,but
someprovisionsaredeductedfromthevalueoftheassetconcerned.
Theitemsofincomeandprofitsareshowninthetradingaccountorprofitandlossaccount.
Baseoffinalaccount
ThebasisoffinalaccountisTrialBalance.Tradingaccount,profitandlossaccountand
balancesheetarepreparedfromtrialbalance.Therefore,itisanecessaryconditionforthe
preparationoffinalaccountsthattrialbalanceisfirstpreparedfromthebalancesorbalances
oftheledger.
ImportantNot:
(1)Itemsshownintrialbalancewillbeshowninanyoneofthetradingaccount,profitand
lossaccountandbalancesheet,thatis,theywillnotbeaccountedforintwoaccounts.
(2)ItemsonthedebitsideoftrialbalanceeitherinTradingA/c’sDr.Side,orP.&L.A/cof
​​Dr.Sideandtheremainingitemswhicharenotshowninbothofthemareshowninthe
AssetSide(i.e.rightside)oftheBalanceSheet.
(3)TheitemsonthecreditsideoftrialbalanceareeitherCr.SideorinP.&L.A/c’sCr.Side
andtheremainingitemsthatbothofthemarenotshownintheaccounts,areshowninthe
liabilitiesside(i.e.leftside)oftheBalanceSheet.
FrequentlyAskedQuestions

6. Qs1.Whatare3typesoffinancialstatementsClass11?
Ans.Thereare3typesofFinancialstatementclass11
●Incomestatement
●Balancesheet
●StatementofCashflows
Qs2.Definefinancialstatementsclass11?
Ans.FinancialstatementsinClass11areformalrecordsthatpresentacompany’sfinancial
activitiesandperformance.Theyincludethebalancesheet(snapshotoffinancialcondition),
incomestatement(revenues,expenses,netincome),statementofcashflows(cashinflows
andoutflows),andstatementofretainedearnings(changesinretainedearnings).These
statementshelpassessprofitability,financialposition,andcashflow,providingtransparency
tostakeholderslikeinvestorsandcreditors.
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