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Dear Teachers,

These slides have been prepared based on the NCERT syllabus to support you in teaching Plus One and Plus Two Accountancy and Computerised Accounting.

Please review and verify the content before using it in your classrooms. If you find any errors or have feedback, please let me know.

Mujeeb Rahiman C

HSST Commerce

GHSS Pattikkad

Malappuram Dt.

✉️ mujeebchemmala@gmail.com

9995983075 �

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Chapter 8

Financial Statements - I

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Accounting can be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

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Accounting Process

1) Identifying the financial transactions

3) Posting to Ledger Accounts

2) Recording transactions in Journal

4) Balancing of Accounts

6) Preparing Financial Statements

5) Preparing Trial Balance

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Stakeholders and their Information Requirements

A stakeholder is any person associated with the business. The stakeholders are also called users of accounting information who are normally classified as internal and external.

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Internal Users

Owner :

Likes to know profit and position of the assets/liabilities of business.

Manager :

Interested in information about both profits and financial position.

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External Users

Government :

Information about profitability to levy taxes and to protect interest of stakeholders

Prospective owner :

Past profits and financial position

Bank :

Adequacy of profits as an assurance of the return of loan back in time

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Objectives of preparing financial statements

To present a true and fair view of the financial performance of the business

(Profit / Loss)

Trading and Profit & Loss Account

(Income Statement)

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Objectives of preparing financial statements

To present a true and fair view of the financial position of the business

(Assets, Liabilities and Capital)

Balance Sheet

(Position Statement)

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Capital Items and Revenue Items

The distinction has important implications for making of the trading and profit and loss account and balance sheet. The revenue items form part of the trading and profit and loss account, the capital items help in the preparation of a balance sheet.

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Revenue Expenditures

If the benefit of expenditure extends up to one accounting period, it is termed as Revenue Expenditure.

eg. payment of salaries, rent, etc.

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Capital Expenditure

If the benefit of expenditure extends more than one accounting period, it is termed as Capital Expenditure.

eg. payment to acquire furniture, machinery etc. for use in the business.

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Distinction between Capital Expenditure and Revenue Expenditure

Increases earning capacity

of business

Incurred to maintain the earning capacity

Incurred to acquire fixed assets

Non-recurring by nature

Benefits more than one accounting year

Incurred on day-to-day conduct of business

Generally recurring expenditure

Normally benefits one accounting year

Recorded in balance sheet

Recorded in Trading and Profit and Loss Account

Capital Expenditure

Revenue Expenditure

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Deferred Revenue Expenditure

In normal usage, the advertising expenditure is termed as revenue expenditure. The heavy expenditure incurred on advertising is likely to benefit the business firm for more than one accounting period.

Such revenue expenditures, which are likely to give benefit for more than one accounting period, are termed as deferred revenue expenditure.

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Capital Receipts

If the receipts imply an obligation to return the money, these are Capital Receipts.

eg. capital brought in by the owner or a loan taken from the bank. Another example on a capital receipt can be the sale of a fixed asset like old machinery or furniture.

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Revenue Receipts

If a receipt does not incur an obligation to return the money it is termed as Revenue Receipt.

eg. sales made by the firm and interest received by the business.

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Financial Statements / Final Accounts