This GSEB Class 11 Commerce Accounts Notes Part 2 Chapter 5 Financial Statements of Business Organisations covers all the important topics and concepts as mentioned in the chapter.
Financial Statements of Business Organisations Class 11 GSEB Notes
Generally, each and every trader wants to know the profit or loss and financial position of the business, at the end of every accounting year. Result of the business (Profit or loss) will provide guidance for the next year’s business. Nowadays, it is also important to know the financial position of the business.
In the above situation, at the end of the accounting year, every trader tries to prepare the Trial balance, to know, whether the accounts written are arithmetically correct or not. From the Trial balance, at the end of the specific period, to know the result and financial position of the business, accounts and statements are prepared and they are known as Final Accounts.
→ Financial statements are organised summaries of detail information about the financial position of an enterprise.
→ Traditionally, two accounts are included in financial statements :
- Trading Account and
- Profit and Loss Account.
→ Goods accounts, expenses accounts and incomes accounts are closed by preparing Trading Account and Profit and Loss Account.
→ Gross profit = Sales – Cost of sales
→ Gross loss = Cost of sales – Sales
→ Opening stock of goods, Net purchases of goods and other expenses relating to purchases of goods and production are shown on the debit side of the Trading Account, whereas, Net sales, sale of scrap goods and closing stock of goods are shown on the credit side.
→ There are three types of profit:
- Gross profit,
- Operating profit and
- Net profit.
→ Difference between Gross profit and Operating expenses is called Operating profit.
→ Operating profit = Gross profit – Operating expenses
→ Operating expenses = General Administrative expenses + Selling and Distribution expenses + Depreciation
→ Net profit means excess of the total of all incomes over all expenses.
→ Net profit = Gross profit + Total of all incomes -All types of expenses
→ For knowing the Net profit or Net loss Profit and Loss Account is prepared.
→ On the debit side of Profit and Loss Account, Gross loss and all other business expenses (other than expenses relating to purchase of goods) are written.
→ On the credit side of Profit and Loss Account, Gross profit and all other incomes are written.
→ Net profit is added in the capital of the proprietor and Net loss is deducted from the capital of proprietor.
→ The objective of preparing Balance Sheet is to know the financial position of the business.
→ Balance Sheet is not an account but it is a statement. It has two sides – ‘Liabilities’ (Left- hand side) and ‘Assets’ (Right-hand side).
→ Total of both sides of Balance Sheet should be the same or equal.
→ Trading Account and Profit and Loss Account are accounts while Balance Sheet is a statement.
→ Every adjustment has atleast two effects.