Understanding Financial Statements of Companies

by | Oct 11, 2021 | Roofing | 0 comments

The end part of the accounting process is known as the financial statement.  This end part is a bit complex and makes students working on accounts go for accounting assignment help or accounting homework help. 

The information about the financial position of the business and its profitability is given by the financial statement. Section 129 (1) of the Companies Act 2013, states that the financial statement of a company:

  • should follow the accounting standards which are notified under Section133 and
  • gives the fair view of the state affairs of the company

Objectives of Preparing Financial Statement: –

  • It shows the true nature performance, that is, assets and liabilities, of the business. 
  • It gives the fair view of the financial position, that is, profit or loss, of the business.

Characteristics of Financial Statements: –

  • Financial statements are known to be historical documents since they are related to past period.
  • They are written down in the form of money.
  • Financial statements reflect the financial position with the help of Balance Sheet. They also write down the company’s profitability through Statement of Profit and Loss.

Nature of Financial Statements: –

  1. Recorded facts:

 Recorded facts are known as the data that is used to prepare financial statements that are drawn from accounting records. For example, cost of fixed assets, cash at bank, trade receivables, figures relating to cash in hand, etc. are some of the recorded facts.

 The financial statement does not include the facts that are not recorded in the books if at all they are significant or not. 

The assets that are purchased either at different prices or at different times are reflected in the Balance Sheet at their real cost. 

They are not reflected in the Balance Sheet at their replacement cost because the accounting records that states that the cost price of the set cost is a recorded fact.

  1. Accounting Conventions:

 Accounting Conventions shows certain fundamental accounting principles that are to be kept in mind while preparing financial statement and that have gained wide acceptance.

 For example, because of the convention of ‘Conservatism’, the expected profits are disregarded, and the provision is made in the books for the expected future losses. 

Likewise, the closing inventory is to be valued at the realizable value or at the cost, whichever is less. This signifies that the actual financial position can be much better than the position that is disclosed by financial statements.

  1. Personal Judgements: 

In accounting, personal judgment plays a decisive role. For instance, it is the decision of the accountant that whether the asset is to be depreciated on written down value method, straight-line method, or any other method. 

The rate of depreciation is also decided by him according to his personal judgments. Likewise, even so the inventory is valued at realizable value or cost as in Standard Cost, Average Cost, First in First Out, Last in First Out, etc.

 the accountant has the choice to go with any of these methods. Similarly, it is the responsibility of the accountant to give his personal judgment for the classification of expenditure into capital and revenue, the period for writing off intangible assets, and for the rate of provision for doubtful debts.

There are some general instructions that are to be kept in mind while preparation of Financial Statement, also known as Balance Sheet:

  1. An asset shall be classified as current:

 when it persuades any of the following criteria:

  1. after the reporting date, it is anticipated to be realized within the span of twelve months
  2. it is intended for consumption or sale in, or is expected to be realized in, the normal operating cycle of the company,
  3. for the purpose of being traded, it is held predominately,

Else, the remaining assets shall be classified as non-current.

  1. Operating cycle is known as the time between the acquisition of assets to be processed and their realization either in cash or cash equivalents.

 It is assumed to have a duration of twelve months when the normal operating cycle of the company cannot be identified..

  1. A liability shall be classified as current:

 only when it fulfills any of the following criteria:

  1. it is held predominant for the purpose of being traded,
  2. it must be settled in the company’s normal operating cycle,
  3. after the reporting date, it is due to be settled within twelve months.Rest all are said to be non-current liabilities.
  1. Trade receivables are the receivables that can be called so if they are in the respect of the amount due on the basis of the goods and services sold in the normal course of business. They might include Bills Receivables and Sundry Debtors.
  1. Payables that are in the respect of the amount based on the account of services rendered or goods sold in the normal course of business, is known as trade payables.
  1. No debit balance of profit and loss along with assets: 

The elimination of the debit balance of the Profit and Loss statement from the assets is a mandatory change in Schedule 3. Now, it is presented as the negative balance under the subheading ‘Reserve and Surplus’.

  1. Miscellaneous Expenditure such as Discount on Issue of Shares/Debentures, Preliminary Expenses, Loss on Issue of Debentures, Underwriting Commission must be written off from the sub-heading Securities Premium Reserves (if at all it exists) or from Surplus, that is, balance in Statement of Profit and Loss within ‘Reserve and Surplus’ or General Reserve, in the year in which they occur.
  1. The elimination of the concept of ‘Schedules’ as per Schedule 3 helps such information to be furnished in ‘Notes to Accounts’.

These were a few basic points that students studying accounts must keep in mind and can refer to while going for accounting assignment help or accounting homework help.

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