Financial statement of sole proprietorship
Meaning
Financial Statements are the summaries of the accounts of a business enterprise and shows the
profitability and financial position at the end of the accounting period.
It includes at least two basic statements:
A) Trading and & Profit and Loss Account
B) Balance Sheet
Trading Account
It is prepared for calculating the gross profit or gross loss arising out of the trading activities of a
business.
All expenses which relate to either purchase of raw material or manufacturing of goods are
recorded in the
Trading account. All such expenses are called ‘Direct Expenses’.
Examples of direct expenses:
• Carriage or freight inwards
• Manufacturing wages
• Power and fuel
• Factory lighting
• Factory rent and rates
• Royalties
• Consumable stores
Calculation of Cost of Goods Sold:
Cost of Goods Sold = Opening stock + Net Purchases + Direct Expenses – Closing stock
Cost of Goods Sold = Sales – Gross Profit
Case:
Calculate Net Sales and Gross Profit from the following information:
Cost of Goods Sold Rs.1,00,000
Gross Profit 20% on Sales
Solution: Sales will be 1,00,000 × (100/80) = Rs.1,25,000
Gross Profit = Sales – Cost of Goods Sold
= Rs.1,25,000 – Rs.1,00,000
= Rs.25,000
Profit and loss account
Trading account only shows gross profit earned as a result of buying and selling goods. However,
there are
other expenses also which must be included to get the net profit, for this Profit and Loss
Account is
prepared.
All Distribution, office, selling, administrative and miscellaneous expenses like, interest on loan,
interest on
capital etc. are included in Profit and Loss Account.
A Profit & Loss A/c is an account into which all gains and losses are collected, in order to
ascertain the
excess of gains over the losses or vice-versa.
Balance sheet
A Balance Sheet is a statement at a particular date showing on one side the trader’s property
and
possessions and on the other hand the liabilities.
Balance sheet contains all the Assets and Liabilities to show the exact financial position of the
business. It is
known as Balance Sheet because it shows the balances of ledger accounts which are left open
after
transferring all the nominal accounts to Trading & Profit & loss Account. Balances of all the Real
and
Personal Accounts are grouped together and shown in Balance Sheet as Assets and Liabilities.
Marshalling of Assets and Liabilities in Balance Sheet
The assets and liabilities must be shown in such a manner that the financial position of the
business can be
assessed through it easily and quickly. Thus, an arrangement is made in which assets and
liabilities are
shown in the balance sheet. Such an arrangement is called marshalling of assets and liabilities.
There are
three methods of marshalling:
1. Permanency Preference Method
2. Liquidity Preference Method
Permanency Preference Method
Under this method, the assets and liabilities are shown in balance sheet in the order of their
permanence.
In other words, the more permanent the assets and liabilities.
Liquidity Preference Method
Under this method, assets and liabilities are shown in order of their liquidity. The more liquid
the assets.
Classification of Assets
1. Non-current Assets: Acquired for continuous use and last for many years.
Example: Furniture, Motor Vehicles etc.
2. Current Assets: Either in the form of cash or can be easily converted into cash within 1 year of
the date
of Balance Sheet.
Example: Accrued Income, Closing stock etc.
Classification of Liabilities
1. Non-Current/ Long-term Liabilities
Liabilities which are to be paid after 1 year or more.
Example: Debentures, Public Deposits, etc.
2. Current or Short-term liabilities
Liabilities which are expected to be paid within 1 year of the date of the Balance Sheet.
Example: Bank overdraft, Bills Payable etc.
3. Contingent Liabilities
They are liabilities which will become payable only on the happening of some specific event,
otherwise not.
Examples:
a. Liabilities for bill discounted
b. Liabilities in respect of a suit pending in a court of law
c. Liability in respect of a guarantee given for another person.
