FOA CO-2
UNIT–II: Preparation of Financial statements: Income statement and Balance sheet – Bank
Reconciliation Statement – Inventory valuation and Depreciation.
Preparation of Financial Statements with Examples
1. Income Statement (With Examples)
An Income Statement summarizes a company's revenues, expenses, and profits or losses over a specific
period.
Format of Income Statement
Revenue:
Sales Revenue: ₹5,00,000
Less: Returns and Allowances: ₹50,000
Net Revenue: ₹4,50,000
Expenses:
Cost of Goods Sold (COGS): ₹2,50,000
Operating Expenses: ₹1,00,000 (e.g., Rent: ₹30,000, Salaries: ₹50,000, Utilities: ₹20,000)
Total Expenses: ₹3,50,000
Net Income:
Revenue - Expenses = ₹1,00,000
Example
A bakery shop had the following for 2023:
Sales revenue: ₹10,00,000
COGS: ₹6,00,000
Operating expenses: ₹2,00,000
Net Income: ₹2,00,000
2. Balance Sheet (With Examples)
The Balance Sheet shows the financial position of a company at a specific date, detailing assets,
liabilities, and equity.
Format of Balance Sheet
Assets:
1. Current Assets:
o Cash: ₹1,00,000
o Accounts Receivable: ₹50,000
o Inventory: ₹2,00,000
Total Current Assets: ₹3,50,000
2. Non-Current Assets:
o Property, Plant, and Equipment (Net): ₹10,00,000
Total Assets: ₹13,50,000
Liabilities and Equity:
1. Liabilities:
o Current Liabilities: Accounts Payable: ₹1,00,000
o Non-Current Liabilities: Long-Term Loan: ₹5,00,000
2. Equity:
o Owner’s Equity: ₹7,50,000
Total Liabilities and Equity: ₹13,50,000
Example
A grocery store's Balance Sheet as of Dec 31, 2023:
Total Assets: ₹25,00,000
Total Liabilities: ₹10,00,000
Equity: ₹15,00,000
Balance Sheet T-Shape Format
The Balance Sheet represents assets on one side and liabilities & equity on the other. This format helps
illustrate how assets and liabilities balance each other.
Balance Sheet
Assets Amount (₹) Liabilities and Equity Amount (₹)
Current Assets Current Liabilities
- Cash X - Accounts Payable (X)
- Accounts Receivable X - Short-Term Loans (X)
- Inventory X - Accrued Expenses (X)
Total Current Assets X Total Current Liabilities (X)
Non-Current Assets Non-Current Liabilities
- Property, Plant & Equipment X - Long-Term Debt (X)
- Investments X - Deferred Tax Liabilities (X)
- Intangible Assets X Total Non-Current Liabilities (X)
Total Non-Current Assets X
Equity
Total Assets X - Owner’s Equity/Capital X
- Retained Earnings X
Total Equity X
Total Liabilities & Equity X
Explanation:
1. Income Statement (T-Shape):
o The left side represents revenues and the right side shows expenses. The net income is
calculated by subtracting the total expenses from revenues.
2. Balance Sheet (T-Shape):
o The left side represents assets (current and non-current).
o The right side represents liabilities (current and non-current) and equity (owner’s equity
and retained earnings).
o The total of assets must always equal the total of liabilities and equity, hence balance.
Bank Reconciliation Statement
A Bank Reconciliation Statement (BRS) compares the cash balance per the bank statement and the
company's ledger.
Steps to Prepare BRS
1. Identify Differences:
o Outstanding checks.
o Deposits in transit.
o Bank fees or errors.
2. Adjustments:
o Add: Deposits in transit (not yet reflected in the bank).
o Subtract: Outstanding checks and bank fees.
Example
Bank Statement Balance: ₹50,000
Add: Deposits in Transit: ₹10,000
Less: Outstanding Checks: ₹5,000
Adjusted Bank Balance: ₹55,000
Company's Ledger Balance: ₹55,000
Reconciled!
Inventory Valuation
Inventory valuation determines the cost of unsold goods. Common methods:
FIFO (First In, First Out)
LIFO (Last In, First Out)
Weighted Average Cost
Example
A company buys 3 batches of inventory:
10 units @ ₹100 each = ₹1,000
20 units @ ₹120 each = ₹2,400
15 units @ ₹130 each = ₹1,950
FIFO Method (Assuming 25 units sold):
Cost of Goods Sold (COGS): 10 units × ₹100 + 15 units × ₹120 = ₹2,800
Closing Inventory: ₹1,000 (remaining units valued at ₹130 each).
Weighted Average Method:
Average Cost: (₹1,000 + ₹2,400 + ₹1,950) ÷ 45 units = ₹120.
COGS: 25 units × ₹120 = ₹3,000.
Particulars Amount (₹)
Balance as per Cash Book X
Add: Deposits not yet credited
- Deposit on [Date] X
Less: Outstanding Checks
- Check number [X] issued on [Date] (X)
Add: Bank Charges (not recorded in cash book) X
Less: Interest (earned but not recorded) (X)
Add: Errors in Cash Book (if any) X
Less: Errors in Bank Statement (if any) (X)
Balance as per Bank Statement X
Balance as per Bank Statement X
Explanation of the Proforma Components:
1. Balance as per Cash Book:
o This is the starting point, which is the balance shown in your company's cash book (bank
account as per the books).
2. Add: Deposits Not Yet Credited:
o These are the amounts deposited in the bank but have not yet been reflected in the
bank statement (e.g., deposits made after the bank's working hours).
3. Less: Outstanding Checks:
o These are checks issued by the company but have not been presented to the bank for
payment, so they don't appear in the bank statement yet.
4. Add: Bank Charges (Not Recorded in Cash Book):
o Any charges deducted by the bank for services like monthly maintenance fees,
transaction fees, etc., which may not be recorded in the cash book.
5. Less: Interest Earned (Not Recorded in Cash Book):
o Interest earned on the bank account but not yet recorded in the company’s cash book.
6. Add: Errors in Cash Book:
o If there were any errors made while recording transactions in the cash book, such as
overstatement or understatement of amounts.
7. Less: Errors in Bank Statement:
o Errors that the bank may have made while processing transactions (e.g., double charges
or misrecorded deposits).
8. Balance as per Bank Statement:
o The final balance after all the adjustments, which should match the balance shown on
the bank statement.
5. Depreciation
Depreciation allocates the cost of tangible assets over their useful life. Common methods include:
Straight-Line Method (SLM)
Declining Balance Method
Straight-Line Method (SLM)
Formula:
Depreciation Expense per Year=Cost - Salvage Value ÷ Useful Life
Example:
Machinery purchased for ₹1,00,000, salvage value ₹10,000, useful life 10 years.
Depreciation per year = (₹1,00,000 - ₹10,000) ÷ 10 = ₹9,000/year.
Declining Balance Method
Formula:
Depreciation Expense=Book Value×Depreciation Rate
Example:
Asset cost: ₹1,00,000, depreciation rate: 20%.
Year 1: ₹1,00,000 × 20% = ₹20,000.
Year 2: ₹80,000 × 20% = ₹16,000.
