Financial Accounting

Financial Statements

Explanation

Income Statement or Profit and Loss Statement -

• Period Covered: Generally covers a specific period of time (such as a quarter or year)
• Equation : Revenues - Expenses = Net Income.
• Accounting principles :

In accordance with the Generally Accepted Accounting Principals (GAAP), revenue is always recorded in the period of the sale of the goods and services, which may not be the same period when cash is actually received.

Balance Sheet -

• Period Covered: It is a statement of assets and liabilities at the end of an accounting period
• Equation : Assets = Liabilities + Stockholders’ Equity / Owners Equity
• Accounting Principles :
• Cost Principle: The cost principle requires that the asset be shown in the asset account at its original cost rather than at the recently appraised market value
• Matching Principle: It requires expenses to be matched either with revenues or with the time period when they are used. The cost of the unused supplies/Raw material Inputs remains on the balance sheet in the asset account Supplies/ Input Raw material
• Going Concern Assumption: A classic example to relate here is Prepaid insurance. It represents the cost of insurance that has not yet expired. On the expiry of insurance, the expired cost is moved to Insurance Expense on the income statement as required by the matching principle

The cost of the insurance that has not yet expired remains on the balance sheet (is "deferred" to the balance sheet) in the asset account Prepaid Insurance.

This is followed following the accounting principle of going concern entity which implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason.

An entity is a going concern if no evidence is available to believe that it will or will have to cease its operations in the foreseeable future.

• Money measurement concept: To record only those assets that can be expressed in monetary terms

Cash flow statements (CFS) -

• Period Covered: Generally covers a specific period of time (such as a quarter or year or even monthly statements)
• Equation : CFS = Net cash flows from operating activities (+) investing activities (+) financing activities.
• Accounting Principles :

International Accounting Standard (IAS 7) Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements.

Cash flows are drafted and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis.

Statement of retained earnings -

• Period: Generally covers a specific period of time imputed by users of information
• Equation: Retained earnings (RE) = Beginning Period RE (+) Net Income/ Loss (–) Cash Dividends (–) Stock Dividends

Retained Earnings (RE) are the portion of a business’ profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business.

These represent a useful link between the income statement and the balance sheet, as they are recorded under shareholders’ equity which connects the two statements.

Financial Statements

Where do we find them?

Shortcut key

Income and Expenditure or Profit and Loss Account -

Where do we find them? On gateway of Tally screen

Income and Expenditure Account :

Income & Expenditure Statement is suitable for organizations that do not engage in the trading of goods or services.

We can toggle between Income and Expenditure Statement and Profit & Loss A/c by pressing F 11 on the keyboard and setting the option Use Income and Expenses A/c instead of Profit and Loss A/c? to Yes/No as, as required.

For Profit and Loss Account = Letter “P” on the keyboard

For Income and expenditure Account = Letter “N” on the keyboard

Balance sheet -

Where to find it? On the gateway of Tally screen.

Letter “B” on the keyboard

Cash flow statements -

Where to find it? Gateway of Tally > Display > Cash/Funds Flow > Cash Flow .