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Economics

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Abstract

The balance sheet is a financial statement which represents a record of the


organizations’ assets, liabilities, and net worth. The balance sheet can also be
defined as the “statement of financial position,” but the term “balance sheet” will
be used in this book. This record always refers to a specific point in time. A
balance sheet can be viewed at any point in time, but normally a business views
this on a monthly basis and fiscal year basis. Assets are items that are worth
money to you and are in your possession or are owed to you. Liabilities are debts
that you owe for the assets. Net worth is the value of your company. The basic
equation for the balance sheet is “assets equal liabilities plus net worth or
shareholder’s equity.” It is called a balance sheet because both sides of the
equation must be equal.

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Introduction :

The term balance sheet refers to a financial statement that reports a company's assets,
liabilities, and shareholder equity at a specific point in time. Balance sheets provide the
basis for computing rates of return for investors and evaluating a company's capital
structure.

Trading Account
Trading Account is prepared to know profitability of business due to buying and selling or
manufacturing and selling. It shows the profit from the main business; buying and selling
other than the business isn’t included in Trading Account.
 Trading Account is the first stage in preparing a final account. It shows the gross profit
or gross loss during an accounting year.

Profit & Loss Account

The P&L statement is one of three financial statements every public company issues on a
quarterly and annual basis, along with the balance sheet and the cash flow statement. It is
often the most popular and common financial statement in a business plan as it shows how
much profit or loss was generated by a business.

Balance Sheet

The balance sheet is a snapshot of your business financials. It includes assets, and liabilities
and net worth. The “bottom line” of a balance sheet must always balance (i.e. assets =
liabilities + net worth). The individual elements of a balance sheet change from day to day
and reflect the activities of a business. Analyzing how the balance sheet changes over time
will reveal important financial information about a business.

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Financial Statement

➢ Financial Statements are prepared to get an idea of profit or loss as


well as the financial position of the firm or business.
➢ It is prepared at the end of the financial year.
➢ The financial statements are useful for the users in understanding
the position and status of business and making decisions
accordingly.
➢ A set of financial statements includes
✓ a Balance Sheet
✓ a Profit and Loss Account
✓ Schedules and notes forming part of balance sheet, and Profit
and Loss Account.
➢ Financial Statements are prepared from the Trial Balance to get an
idea of:
✓ How much profit was earned in a particular period?
Profit and Loss Account shows the profit earned during
the year.
✓ What is financial position of the business at the end of a
particular period? Balance Sheet is a position statement
that shows the financial position on a particular date.
➢ Balance sheet and Profit and Loss Accounts are the ‘Final
Statements or Accounts’. They are the end product of Financial
Accounting.

Illustration
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Trial Balance
Debit Balances Amt. (Rs.) Credit Balances Amt. (Rs.)
Drawings 13,000 Capital 96,700
Income Tax 2,200 Sales 2,65,100
Machineries 20,000 Commission 2,400
Opening Stock (1.1.1987) 30,500 Provision for Doubtful Debts 2,500

Sales Returns 1,200 Purchase Returns 5,750


Purchases 2,26,000 Sundry Creditors 20,000
Rent and Taxes 7,500
End Debts 2,550
Wages 7,200
Salaries 8,000
Furniture 6,000
Sundry Debtors 40,000
Cash in Hand 1,540
Building 25,000
Miscellaneous 1,760
3,92,450 3,92,450

Trading Account
Trading Account for the year ended 31st December,1987
Particulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)
To Opening 30,500 By Sales 2,65,100
Stock
To Purchases 2,26,000 Less : Sales 1,200 2,63,900
Returns
Less : Purchase 5,750 2,20,250 By Closing Stock 32,300
Returns
To Wages 7,200
Add : 1,200 8,400
Outstanding
Wages
To Gross Profit 37,050
(Trans. To P&L
Account)
2,96,200 2,96,200

Profit & Loss Account

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Profit and Loss Account for the year ended 31st December, 1987
Particulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)
To Rent & Taxes 7,500 By Gross Profit 37,050
Less : Paid in Advance 200 7,300 By Commission 2,400
To Salaries 8,000
Add : Outstanding 2,500 10,500
Salaries
To Miscellaneous 1,760
To Bad Debts 2,550
To Provision for 800
Doubtful Debts
(@20% on Rs. 40,000)
To Depreciation on:
Machineries (@ 10% on 2,000
Rs. 20,000)
Furniture (@15% on Rs. 900 2,900
6,000)
To Net Profit 13,640
(Transferred to Capital
A/c)
39,450 39,450

Balance Sheet
Balance Sheet as at 31st December, 1987
Liabilities Amt.(Rs.) Amt.(Rs.) Assets Amt. (Rs.) Amt. (Rs.)
Capital : Building 25,000
Opening Balance 96,700 Machineries 20,000
Add: Net Profit 13,640 Less : Depreciation 2,000 18,000
during the year @10%
1,10,340 Furniture 6,000
Less: Drawings 15,200 95,140 Less : Depreciation 900 5,100
@ 15%
Sundry Creditors 20,000 Closing Stock 32,300
Outstanding Sundry Debtors 40,000
Liabilities:
Wages 1,200 Less : Prov. For 3,300 36,700
Doubtful Debts
(Rs. 2,500 + 800)
Salaries 2,500 3,700 Taxes paid in 200
Advance
Cash in Hand 1,540
1,18,840 1,18,840

Analysis
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Trial Balance

The trial balance shows the general accounts of the company. The accounts
reflected on a trial balance are related to all major accounting items, including
assets, liabilities, equity, revenues, expenses, gains, and losses for the year ended
31.12.1987.

Trading Account

The trading account here shows the particulars debit to opening stock, Purchase, Wages and
the particulars credit by sales and closing stock. Then, we can get the gross profit amounting
to Rs. 37,050.

Profit & Loss Account

The above P&L account particulars shows the debit to Rent & Taxes, Salaries,
Miscellaneous, Bad Debts, Provision for Doubtful Debts, To Depreciation from
Machines (@10% on Rs. 20,000) and Furniture (@15% on Rs. 6,000) and the
credit by Gross Profit and by Commission. Then we can get the Net Profit
amounting to Rs. 13,640.

Balance Sheet

The above Balance Sheet shows the total liabilities and asset where the liabilities
are listed from Capital, Opening Balance, Sundry Creditors and Outstanding
Liabilities and the assets are listed by Building, Machineries, Furniture, Closing
Stock, Sundry Debtors, Taxes paid in Advance and Cash in Hand. Thus,
balancing the sheet at Rs. 1,18,840.

Conclusion
On a concluding note, a balance sheet is one of the financial statement
reports that shows the financial situation of an entity on a specific date.
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The balance sheet of an entity has a wealth of information that can be
used to assess financial stability and performance. It is a report sheet
that requires total assets to match total liabilities + shareholder capital.
Hence, the Calculation would be : Assets = Liability + Capital.
Assets - An asset is a resource that an entity owns and uses to generate
positive economic value.
Liabilities - This is a list of obligations owed to others by an entity. The
money contributed by the shareholders is referred to as capital or equity.

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