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MODULE 1 PREPARATION OF FIN ANCIAL STATEMENTS In the day to day life, individuals and organizations earn incomes from various sources and incur expenses. To ascertain the excess of income over expenditure during a particular period, proper records relating to expenses and incomes have to be maintained. Meaning of Accounting Accounting is a means of communicating the results of business operations to various parties interested in or connected with the organisation. It is the process of systematic recording and analysis of business transactions, preparation and interpretation accounts and statements required for the ascertainment of trading results and financial position of the organisation. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information. Accounting is the language of business. A language is a medium of communication. Accounting communicates the results of the operations of an organization to various parties who are interested in them. It — 1. Identifies the transactions of the organization 2. Measures the identified transactions . Records the transactions in the Journal Classifies the recorded transactions in the Ledger Prepares Income Statement and Position Statement awh Ye . Analyses the results and 7. Communicates the information to interested persons. : Accounting is associated not only with business but also with every body who is interested in keeping an account of money received and money spent. Expenses not shown in the Profit and Loss Account ‘The following expenses are not shown in the Profit and Loss aecouny. ‘1. Income Tax - ee tax is a personal expense of the proprietor and is treated 2. Life Insurance Premium - ‘Premium paid on the life policy of the Proprietor is chai _ 3. Domestic and Household Expenses - These are personal expenses of the proprietor and are Distinction between Gross Profit and Net Pr The following are the differences betwee 1. The difference between between the sum of gro, a8 drawings ged to drawings ACCOunt treated as drawings i N 8TOSS profit and Net profit. Sales and cost of goods sold 8S profit and indirec ai a Pl id indirect and indirect Spas is . Net profit is disclosed by account of the Proprietor, 2. Balance Sheet Balance Sheet is a State Bac ae Ment prepared to as, . . Ppassels abilities and capital tris ce ascertain the financial position of The total of assets j S Prepare. a cae S equal to total of liabiliti SON 4 particular date A balance shee! les and capital, of an enterprise at a business, and not fora Particu t Is 4 Statement 4 Biven date, Features of Balance Sheet The following are the main fe; 1. Itisa Statement and not 2. It Consists of; Assets, liabjl; 2. oe ; A pa a, ed a date and not for a Particular period. han a ‘é gation of Trading and Profit and Loss accoui cial position of, an organization, Portance of Balance Sheet Of assets, liabilities and capital indicating the fi atures of a Balance Sheet.- an account. lities and capital, sheet i i Balance Shee oe . siitatlone gf tations of a Balance Sheet d of historical cost and as such alues of joes not exhibit the current Vv. s prepared on the basis assets and liabilities. as on a part valuation. depreciation of fixed ry “ 1 ing policies relating to invent Joubtful debts. i ise which are such as skill and technical experti in factors he value of certan e success of the business. Format of Balance Sheet Chere are two forms of Balance Sheet- 1. Horizontal Form f balance alled horizontal form o! in the form of an account Is cal n of Balance Sheet in ide and left hand side. On the right hand side, assets and Balance Sheet of .... Liabilities € ‘apital Account- Opening balance Add: Net profit Interest on capital z Assets Goodwill Land and Buildings Less: Depreciation Plant and Machinery Less:Depreciation Less: Drawings Sundry Creditors Bills Payable Bank Overdraft Outstanding Expenses Other liabilities Furniture Less: Depreciation Sundry Debtors Stock in Trade Bills Receivable Prepaid Expenses Accrued Incomes Cash at Bank Cash in Hand 
