Accountimg for begginers

70.What is the purpose of an income statement?

The income statement provides a summary of a company’s revenues, expenses,
and profits or losses over a specific period.
It helps stakeholders evaluate the financial performance and profitability of the
business.
This statement is useful for investors, creditors, and management for decision-
making purposes.

71] What are the two main sections of a financial statement?

Income Statement – Reports the financial performance over a specific time,
showing revenues, expenses, and net profit or loss.
Statement of Financial Position (Balance Sheet) – Shows the financial condition at
a specific date, including assets, liabilities, and equity.

72. What does the statement of financial position represent?

 The statement of financial position, also known as the balance sheet, presents a
company’s financial status at a specific point in time.
 It lists the company’s assets (what it owns), liabilities (what it owes), and equity
(owner’s claim).
 It reflects how resources are funded—either through debt (liabilities) or owner's
capital (equity).

Define "Revenue" in an income statement.

 Revenue is the total amount earned by a business from its operating activities such as
the sale of goods or services.
 It is recorded at the top of the income statement before any expenses are deducted.
 For example, if a company sells products worth ₹500,000 in a year, that amount is
recorded as revenue.

74. Define Current Assets with examples.

 Current assets are short-term assets expected to be converted into cash, sold, or
consumed within one year or the normal operating cycle, whichever is longer.
 They are important for managing day-to-day operations and liquidity.
 Examples include:
1. Cash and bank balances
2. Accounts receivable
3. Inventory
 4. Prepaid expenses

75. What are Non-Current Liabilities? Give two examples.

 Non-current liabilities are long-term financial obligations not due within one year.
 These represent funds the company has borrowed or obligations it must fulfill after a
year.
 They are listed under the liabilities section in the balance sheet.
 Examples include:
1. Long-term loans from banks
2. Bonds or debentures payable

76. What is an accrued expense?

 An accrued expense is an expense that has been incurred during the accounting period
but has not yet been paid or recorded.
 It is recorded in the books using the accrual basis of accounting.
 This ensures expenses are matched with revenues in the correct period, even if cash
payment hasn’t occurred.
 Examples include unpaid salaries, interest, or utility bills due at period-end.

77. What is the difference between gross profit and net profit?

 Gross Profit is the profit earned after deducting only the cost of goods sold (COGS)
from total revenue.
Gross Profit = Revenue – COGS
 Net Profit is the final profit after deducting all operating, administrative, interest, and
tax expenses.
Net Profit = Gross Profit – Total Expenses
 Gross profit indicates production and pricing efficiency, while net profit reflects
overall profitability.
 For example, a business may have ₹1,00,000 in gross profit, but after deducting
₹40,000 in expenses, its net profit is ₹60,000.

78. What is the accounting equation used in the balance sheet?

 The accounting equation is the foundation of double-entry bookkeeping:

Assets = Liabilities + Equity
 It ensures that a company's financial records are always balanced.
 Assets are resources owned by the business,
Liabilities are what it owes to others,
Equity is the owner’s claim after liabilities are paid.
  For example, if a company has ₹10 lakh in assets and ₹6 lakh in liabilities, equity
would be ₹4 lakh.

79. Define retained earnings in financial statements.

 Retained earnings refer to the portion of net income that is kept in the company
instead of being distributed as dividends.
 It is accumulated over time and reinvested for business growth, asset purchase, or
debt repayment.
 For example, if a firm earns ₹5 lakh and pays ₹2 lakh in dividends, ₹3 lakh is added
to retained earnings.

6 marks:

Format and Purpose of an Income Statement

 Format: The income statement follows a structured layout, starting with

revenue/sales, followed by cost of goods sold (COGS), gross profit,
operating expenses, and ending with net profit.

 Purpose: It shows a company’s profitability over a specific period (e.g.,

quarterly or annually) by summarizing revenues, expenses, and profits.

 Key Elements: Includes operating and non-operating income/expenses,

taxes, and net income, helping stakeholders assess financial performance.

2. Key Components of the Statement of Financial Position

(Balance Sheet)

 Assets: Resources owned by the business (current assets like cash,

inventory; non-current assets like property, equipment).

 Liabilities: Obligations owed (current liabilities like accounts payable;

long-term liabilities like loans).

 Equity: Owner’s claim after liabilities, including retained earnings and

share capital, representing net worth.

3. Steps in Preparing an Income Statement

1. Record Revenue: Total sales/income earned during the period.

2. Subtract COGS: Direct costs linked to production to find gross profit.

3. Deduct Expenses: Operating (salaries, rent) and non-operating (interest,

taxes) expenses.

4. Calculate Net Profit: Final profit after all deductions, indicating financial
health.

4. Role of Financial Statements in Decision-Making

 Investors: Assess profitability and growth potential before investing.

 Creditors: Evaluate creditworthiness and repayment ability.

 Management: Track performance, budget, and strategize based on

financial data.

5. Difference Between Trading Account and Profit & Loss

Account

 Trading Account:
o Focuses on gross profit by comparing sales revenue and COGS.

o Includes only direct expenses related to production (e.g., raw materials,

wages).

 Profit & Loss Account:

o Calculates net profit by considering indirect expenses (e.g., admin,
marketing).

o Incorporates non-operating items (interest, taxes) beyond trading

activities.

6 Prepare a Trading and Profit & Loss Account for the given data
Given:

 Sales: ₹100,000
 Opening Stock: ₹10,000
 Purchases: ₹60,000
 Closing Stock: ₹15,000
 Wages: ₹5,000
 Office Rent: ₹8,000
 Interest Income: ₹3,000

Trading and Profit & Loss Account for the year ended

Trading Account
Amount Amount
Particulars Particulars
(₹) (₹)

To Opening Stock 10,000 By Sales 100,000

By Closing
To Purchases 60,000 15,000
Stock

To Wages 5,000

To Gross Profit
40,000
c/d

Total 115,000 Total 115,000

Profit & Loss Account

Amount Amount
Particulars Particulars
(₹) (₹)

By Gross Profit
To Office Rent 8,000 40,000
b/d

By Interest
3,000
Income

To Net Profit transferred to

35,000
Capital A/c

Total 43,000 Total 43,000

8 marks

86. Income Statement and Statement of Financial Position

Income Statement (Profit & Loss Account) for the Year Ended...

Amount
Particulars
(₹)

Sales 80,000

Less: Cost of Goods Sold

(COGS)

0
Opening Stock
(Assumed)

Add: Purchases 50,000

Less: Closing Stock (8,000)

COGS 42,000

Gross Profit (Sales - COGS) 38,000

Less: Operating Expenses

Rent 5,000

Salaries 10,000

Total Expenses 15,000

Net Profit (Gross Profit -

23,000
Expenses)
 Statement of Financial Position (Balance Sheet) as on...

Amount Amount
Liabilities Assets
(₹) (₹)

Capital 50,000 Fixed Assets 40,000

Current
Add: Net Profit 23,000
Assets:

Total Capital 73,000 - Closing Stock 8,000

Liabilities: - Cash at Bank 12,000

- Creditors 10,000 Total Assets 60,000

- Loan 15,000

Total Liabilities 25,000

Total (Capital + Total

98,000 60,000
Liabilities) (Assets)

87. How Adjustments Ensure Accurate Financial Reporting

(8 Marks)

1. Matching Principle Compliance

o Adjustments like outstanding expenses, prepaid expenses, and
accrued incomes ensure expenses and revenues are recorded in the
correct accounting period.
2. Correct Profit Calculation
o Adjusting depreciation, bad debts, and inventory valuation prevents
over/understatement of profits.

3. True Financial Position

o Recording provisions (e.g., doubtful debts) and contingent
liabilities reflects realistic asset/liability values.

4. Regulatory & Tax Compliance

o Ensures adherence to accounting standards (AS/Ind AS) and tax
laws by recognizing all liabilities/incomes.

5. Prevents Manipulation
o Adjustments like stock verification and bank reconciliation reduce
errors/fraud risks.

6. Better Decision-Making
o Accurate adjustments help stakeholders (investors, management) rely on
financial statements for analysis.

88. Sample Income Statement & Statement of Financial

Position (Notional Figures for 8 Marks)

Income Statement

Particulars Amount
 (₹)

Sales 1,00,000

Less: COGS (60,000)

Gross Profit 40,000

Less: Operating
(25,000)
Expenses

Net Profit 15,000

Statement of Financial Position

Amount Amount
Liabilities Assets
(₹) (₹)

Capital 50,000 Fixed Assets 70,000

Add: Net Current

15,000 30,000
Profit Assets

Total
Creditors 20,000 1,00,000
Assets

Total
85,000
Liabilities