To measure the performance of business ventures – Final accounts are prepared periodically. This helps to evaluate the wellness of businesses at interval. In continuation of my knowledge sharing from LBS experience, I will like to enumerate the types of FINANCIAL STATEMENTS covered in the final accounts though in phases.
We shall be covering two of the financial statements thus:
- Balance sheet
- Statement of profit and loss
Let us see in detail the types of financial statements. A balance sheet is basically an accurate representation of assets and liabilities of a business. They contain all details pertaining to the long-term and short-term assets, debts, and capital of a firm. It is one of the most important tools stakeholders use to understand a particular business. Every company has to annually prepare and present a balance sheet at the minimum.
Contents of a Balance Sheet
According to Schedule VI, a balance sheet must comprise the following contents and requirements. Every balance sheet basically contains these parts: share capital, reserve and surplus, current & non-current assets and liabilities, borrowings, etc.
Balance sheets must state disclosures relating to share capital in notes to accounts. Further, they must contain the following modifications and additions:
- All rights, preference and restrictions associated with each class of share have to be specified.
- Specific disclosures pertaining to the identity of certain shareholders.
- Details regarding the number of shares issued, subscribed, paid, reserved and bought back.
Reserve and surplus
The balance sheet must classify reserves and surplus funds in the following manner:
- Capital reserve
- Capital redemption reserve
- Debenture redemption reserve
- Securities premium reserve
- Surplus funds
Current & non-current assets
Every balance sheet has to classify assets in categories of current and non-current. A current item has typical features like these: it is used for less than 12 months, it is mainly held for trading, etc. This distinction is important because it helps make the details of assets more comprehensive.
Similar to assets, borrowings and liabilities can also be current or non-current. Loans are debts that have a repayment period of more than 12 months are non-current borrowings. For example, large bank loans are generally non-current in nature. On the contrary, those with shorter repayment periods are current liabilities.
Even investments come under categories of current and non-current. Investments which can be realized within 12 months are current investments, while others are non-current. Every balance sheet must reflect the business’s investments in this format.
Apart from these basic contents, a typical balance sheet also contains some other information. This includes trade receivables, trade payables, cash and cash equivalent, inventories, etc.
Statement of Profit or Loss
Apart from the balance sheet, a statement of profit or loss is the second important financial statement. It basically shows revenues and expenses of a business. Deduction of taxes from this depicts the final profit or loss amount.
Contents of a Statement of Profit and Loss
- Revenue from operations, including sales and other operating revenue. Furthermore, finance companies have to state revenue from interest, dividend and other services.
- Other income, including income from interest, dividend, non-operating income and income from the sale of investments.
- Expenses, including costs of materials, stock-in-trade, finance costs, depreciation, employees benefits and all other expenses.
Treatment of these three items will finally result in a statement of profit or loss. Accountants also have to deduct taxes and extraordinary items from the profit to ascertain the final profit or loss amount.