Financial Statements – I (Class 11 Accountancy Notes)

1. Meaning of Financial Statements

Financial Statements are reports prepared at the end of an accounting period to show:

Profit or loss earned by a business.
Financial position of the business.
Assets, liabilities, and capital of the business.

Main Financial Statements

Trading Account
Profit and Loss Account
Balance Sheet

2. Stakeholders and Their Information Needs

A stakeholder is any person or group interested in the business.

Stakeholder	Information Required
Owner	Profit earned and financial position
Manager	Business performance and growth
Government	Tax and legal compliance
Investors	Profitability and future prospects
Banks	Ability to repay loans
Creditors	Financial stability of business

3. Capital and Revenue Items

Capital Expenditure

Expenditure that provides benefits for more than one accounting year.

Features

Long-term benefit
Helps acquire fixed assets
Non-recurring in nature
Shown in Balance Sheet

Examples

Purchase of machinery
Purchase of furniture
Building construction
Major improvements to assets

Revenue Expenditure

Expenditure whose benefit is received within the current accounting year.

Features

Short-term benefit
Recurring in nature
Related to daily business operations
Shown in Trading or Profit & Loss Account

Examples

Salaries
Rent
Wages
Repairs
Electricity charges

4. Capital Receipts and Revenue Receipts

Capital Receipts

Receipts that create a liability or increase capital.

Examples

Capital introduced by owner
Loan from bank
Sale of fixed assets

Revenue Receipts

Receipts earned from normal business activities.

Examples

Sales revenue
Commission received
Interest received
Rent received

5. Importance of Distinguishing Capital and Revenue Items

Correct classification helps in:

Accurate calculation of profit or loss.
Preparation of correct financial statements.
Proper taxation.
Showing a true and fair view of business.

Wrong classification leads to incorrect profit and asset values.

6. Trading Account

Meaning

Trading Account is prepared to find out the Gross Profit or Gross Loss from buying and selling activities.

Formula

Gross Profit = Net Sales – Cost of Goods Sold

Gross Loss = Cost of Goods Sold – Net Sales

Items on Debit Side of Trading Account

Opening Stock
Purchases
Wages
Carriage Inwards
Freight Inwards
Factory Expenses

These are called Direct Expenses.

Items on Credit Side

Sales
Closing Stock

7. Cost of Goods Sold (COGS)

Formula

COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock

Direct Expenses Include

Wages
Freight Inwards
Carriage Inwards
Factory Rent
Fuel and Power

8. Profit and Loss Account

Meaning

Prepared to determine Net Profit or Net Loss after considering all indirect expenses and other incomes.

Formula

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

Debit Side (Indirect Expenses)

Salaries
Rent
Advertisement
Repairs
Interest Paid
Bad Debts
Depreciation

Credit Side (Other Incomes)

Commission Received
Interest Received
Rent Received
Discount Received
Dividend Received

9. Gross Profit and Net Profit

Gross Profit

Profit earned from core trading activities.

Formula

Gross Profit = Sales – Cost of Goods Sold

Net Profit

Final profit after deducting all indirect expenses.

Formula

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

10. Operating Profit (EBIT)

Meaning

Profit earned from normal business operations.

EBIT = Earnings Before Interest and Tax

Formula

Operating Profit = Net Profit + Non-operating Expenses – Non-operating Incomes

Non-operating Items

Examples:

Interest on loan
Profit on sale of investments
Loss by fire

These are excluded while calculating operating profit.

11. Balance Sheet

Meaning

A statement showing the financial position of a business on a particular date.

It shows:

Assets
Liabilities
Capital

Accounting Equation

Assets = Capital + Liabilities

12. Format of Balance Sheet

Liabilities	Assets
Capital	Cash
Creditors	Debtors
Loans	Furniture
Bills Payable	Machinery
Bank Overdraft	Stock

Total of both sides must always be equal.

13. Types of Assets

Current Assets

Assets that can be converted into cash within one year.

Examples

Cash
Bank Balance
Debtors
Bills Receivable
Stock

Fixed Assets

Assets used in business for a long period.

Examples

Building
Machinery
Furniture
Plant

Intangible Assets

Assets without physical existence.

Examples

Goodwill
Patent
Trademark

14. Types of Liabilities

Current Liabilities

Payable within one year.

Examples

Creditors
Bills Payable
Bank Overdraft
Outstanding Expenses

Long-Term Liabilities

Payable after one year.

Examples

Bank Loan
Debentures
Long-term Borrowings

15. Capital

Capital represents the owner’s claim in the business.

Formula

Capital = Assets – External Liabilities

16. Drawings

Amount withdrawn by the owner for personal use.

Effect

Reduces capital.
Deducted from capital in Balance Sheet.

17. Marshalling of Assets and Liabilities

Marshalling means arranging assets and liabilities in a specific order.

Methods

(A) Order of Permanence

Most permanent item appears first.

Example:

Building
Machinery
Furniture
Debtors
Cash

(B) Order of Liquidity

Most liquid item appears first.

Example:

Cash
Bank
Debtors
Stock
Furniture

18. Grouping

Grouping means placing similar items under one heading.

Example

Current Assets

Cash
Bank
Debtors
Stock

Current Liabilities

Creditors
Bills Payable

Non-Current Assets

Building
Machinery

19. Closing Entries

Entries passed at the end of the accounting year to transfer balances of income and expense accounts.

Purpose

Close temporary accounts.
Determine profit or loss.

20. Opening Entry

Entry passed at the beginning of a new accounting year to bring forward balances of assets, liabilities, and capital.

Quick Revision Formulas

Gross Profit

Gross Profit = Net Sales – Cost of Goods Sold

Cost of Goods Sold

COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock

Net Profit

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

Operating Profit (EBIT)

Operating Profit = Net Profit + Non-operating Expenses – Non-operating Incomes

Accounting Equation

Assets = Capital + Liabilities

Financial statements are prepared at the end of an __________ period.
Answer: accounting
Purchase of furniture is a __________ expenditure.
Answer: capital
Rent paid is a __________ expenditure.
Answer: revenue
Gross Profit is calculated in the __________ Account.
Answer: Trading
Net Profit is determined through the __________ Account.
Answer: Profit and Loss
Assets are shown on the __________ Sheet.
Answer: Balance
Amount owed by customers is called __________.
Answer: Debtors
Amount owed to suppliers is called __________.
Answer: Creditors
Drawings decrease the owner’s __________.
Answer: capital
Cost of Goods Sold equals Opening Stock + Purchases + Direct Expenses – __________ Stock.
Answer: Closing
Machinery is a __________ asset.
Answer: fixed
Stock is generally a __________ asset.
Answer: current
Capital receipts generally affect the __________ position of a business.
Answer: financial
Revenue receipts arise during normal __________ activities.
Answer: business
Balance Sheet reflects the financial position on a particular __________.
Answer: date

PART C: True or False

Financial statements are useful only for owners.
Answer: False
Purchase of land is a capital expenditure.
Answer: True
Salaries paid are revenue expenditure.
Answer: True
Gross Profit is calculated in Profit and Loss Account.
Answer: False
Creditors are liabilities.
Answer: True
Cash in hand is an asset.
Answer: True
Drawings increase capital.
Answer: False
Balance Sheet shows financial position.
Answer: True
Revenue receipts arise from regular business operations.
Answer: True
Machinery is a current asset.
Answer: False

PART D: Match the Following

Column A	Column B
1. Trading Account	a. Financial Position
2. Profit & Loss Account	b. Gross Profit
3. Balance Sheet	c. Net Profit
4. Debtors	d. Amount Receivable
5. Creditors	e. Amount Payable

Answers

1 – b
2 – c
3 – a
4 – d
5 – e

PART E: One-Word Answers

Owner’s claim in the business → Capital
Amount receivable from customers → Debtors
Amount payable to suppliers → Creditors
Final statement showing assets and liabilities → Balance Sheet
Goods available for sale at year-end → Closing Stock
Benefit lasting for many years → Capital Expenditure
Benefit consumed within one year → Revenue Expenditure
Profit before indirect expenses → Gross Profit
Profit after all expenses → Net Profit
Withdrawal by owner → Drawings

PART F: Assertion–Reason Questions

1.

Assertion (A): Purchase of machinery is a capital expenditure.
Reason (R): Machinery provides benefit for more than one accounting period.

Answer: Both A and R are true and R is the correct explanation.

2.

Assertion (A): Salary paid is a revenue expenditure.
Reason (R): Salary helps in day-to-day business operations.

Answer: Both A and R are true and R is the correct explanation.

3.

Assertion (A): Balance Sheet determines Gross Profit.
Reason (R): Balance Sheet shows assets and liabilities.

Answer: A is false, R is true.

4.

Assertion (A): Drawings reduce capital.
Reason (R): Drawings represent withdrawal of business resources by the owner.

Answer: Both A and R are true and R is the correct explanation.

PART G: Very Short Answer Questions

What is a financial statement?
Answer: A report showing the financial performance and position of a business.
Name the two main financial statements.
Answer: Income Statement and Balance Sheet.
What is Gross Profit?
Answer: Excess of net sales over cost of goods sold.
What is Net Profit?
Answer: Profit remaining after deducting all expenses.
What are assets?
Answer: Resources owned by a business.

PART H: Case-Based MCQs

Case 1

A business purchased machinery for ₹80,000 and paid ₹5,000 for its installation.

Machinery cost is:
A. Revenue expenditure
B. Capital expenditure
C. Revenue receipt
D. Asset loss

Answer: B

Installation charges should be:
A. Ignored
B. Treated as revenue expenditure
C. Added to machinery cost
D. Treated as drawings

Answer: C

Case 2

A trader had Net Sales of ₹4,00,000 and Cost of Goods Sold of ₹3,10,000.

Gross Profit is:
A. ₹90,000
B. ₹1,10,000
C. ₹3,10,000
D. ₹4,00,000

Answer: A

Gross Profit is shown through:
A. Cash Book
B. Trading Account
C. Journal
D. Ledger

Answer: B

BONUS RAPID FIRE (25 Questions)

Fixed asset? → Building
Current asset? → Stock
Liability? → Creditors
Revenue expenditure? → Rent
Capital receipt? → Sale of machinery
Net sales = Sales – ? → Returns Inward
Gross profit found in? → Trading Account
Net profit found in? → Profit & Loss Account
Financial position shown by? → Balance Sheet
Drawings affect? → Capital
Debtors are? → Assets
Creditors are? → Liabilities
Closing stock is? → Current Asset
Machinery is? → Fixed Asset
Cash is? → Current Asset
Furniture purchase? → Capital Expenditure
Wages for installation? → Capital Expenditure
Office salary? → Revenue Expenditure
Sale of goods? → Revenue Receipt
Owner’s investment? → Capital
Opening stock appears in? → Trading Account
Direct expenses go to? → Trading Account
Indirect expenses go to? → Profit & Loss Account
Excess assets over liabilities? → Capital
Accounting year-end statements are called? → Financial Statements