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18.2                                                   Double Entry Book Keeping—CBSE XI


                                                  CHAPTER SUMMARY

                     •  Financial Statements are organised summaries of detailed information about the financial
                       position and performance of an enterprise. The term Financial Statements is used to denote
                       only two basic statements:
                        (i)  Trading and Profit & Loss Account (or Income Statement) which shows the financial
                           performance (i.e., profit earned) of business operations during an accounting period.
                       (ii)  Balance Sheet (or Position  Statement) which  shows  the financial  position of an
                           enterprise at a particular date.
                     •  Objectives and Importance of Financial Statements:
                       (a)  Trading  and Profit &  Loss  Account:  (i) Ascertaining Gross  Profit or Gross  Loss;
                           (ii) Ascertaining Net Profit or Net Loss; (iii) Comparison with Previous Year’s Profit;
                           (iv) Detail of Direct and Indirect Expenses; (v) Preparing Balance Sheet; (vi) Maintaining
                           Provisions and Reserves; and (vii) Calculating accounting ratios.
                       (b)  Balance Sheet: (i) Ascertaining financial position; (ii) Comparison with Previous Year;
                           (iii) Analysis of Individual items; and (iv) Calculating accounting ratios.
                     •  Users of Financial Statements: The information conveyed through Financial Statements
                       is used by the management, investors, potential investors, lenders, short-term creditors,
                       employees, customers, government and their agencies, tax authorities and stock exchanges
                       to satisfy their different information needs.
                     •  Capital Expenditure is the amount of expenditure incurred by an enterprise on purchase
                       of fixed assets that are used in the business to earn income and are not intended for resale.
                       The benefit of Capital Expenditure extends beyond the financial year.
                     •  Revenue Expenditure is the amount of expenditure incurred on running of the business.
                       The benefit of Revenue Expenditure expires within a financial year.
                     •  Deferred Revenue Expenditure is a Revenue Expenditure, the benefit of which extends
                       beyond an accounting period. Example: Unduly large expenditure on advertisement, say, to
                       introduce a new product.
                     •  Final Accounts include (i) Trading, Profit & Loss Account and (ii) Balance Sheet. Final
                       Accounts are prepared on the basis of a Trial Balance.
                     •  Trading Account is the account, which shows the gross profit or gross loss. Its contents
                       are Revenue Receipts (such as sales, services rendered, etc.) on the credit side and Revenue
                       Expenditure (such as cost of goods sold or services rendered) on the debit side.
                     •  Profit & Loss Account is the account, which shows the net profit or net loss of the business
                       for an accounting period. It is credited with the gross profit (or debited with gross loss) and
                       non-business revenue income and debited with indirect revenue expenses.
                     •  Balance Sheet is  a statement, which  sets  out the assets and liabilities of  a firm  or  an
                       institution as at a certain date. It is true on that particular date as every transaction has an
                       impact on the Balance Sheet.
                     •  Grouping: It refers to putting items of similar nature under a common accounting head.
                     •  Marshalling: It refers to arrangement of assets and liabilities in a particular order in the
                       Balance Sheet. Assets and Liabilities are shown  in the Balance Sheet either in order of
                       liquidity or in order of permanence.
                     •  Contingent Liabilities  are  the  liabilities  that may or  may not  take place. The  liability
                       becomes payable on happening of a certain event.
                     •  Presentation of Financial Statements: The Trading and Profit & Loss Account and the
                       Balance Sheet can be presented either in Horizontal Form or in Vertical Form.
                     •  Opening Entry: Opening Entry is the Journal entry through which the closing balances of
                       the previous year are brought forward in the current year’s books of account.
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