FINANCIAL STATEMENTS & ACCOUNTING STANDARDS

Financial Statements are usually known as Balance Sheet. Financial Statements include Balance Sheet, Profit & Loss Account and Notes to Accounts. Balance Sheet is a type of monetary statement which presents the information on financial position of an individual or an entity. Major components of Balance Sheet include Capital, Loan Funds, Fixed Assets, Investments, Current Assets and Current Liabilities. Major components of Profit & Loss Account include Income and Expenditures. Major components of Notes to Accounts include disclosure of significant accounting policies and requirements as per applicable laws and accounting standards.

Balance Sheet is prepared for a particular date and profit & loss is prepared for the period ended on a particular date. In case of company, financial statements are prepared as per schedule VI of the Companies Act, 1956.

Capital is the sum of money with which business is started. Money with which an Individual or Partners start a business is called Capital. Money with which a Company starts a business is called Share Capital. Net Profit from business of an individual is being added to capital and if there is a loss, it is being deducted so capital increases or decreases accordingly in case individuals and partners etc. In case of company, profit is shown as a part of Reserves & Surplus. There can be several types of reserves & surpluses such as profit & loss account, general reserve, share premium, capital redemption reserve etc. There are several words and meanings of share capital, such as Authorized Share Capital, Issued Share Capital, Subscribed Share Capital, Paid-up Share Capital, Equity Share Capital, and Preference Share Capital etc. Capital is shown on the liabilities side of the balance sheet. It is part of the sources of funds.

Loan Funds are of two types, secured Loans and unsecured Loans. Secured loans are the loans which are taken through some security. If secured loans are not repaid within the specified time limit, then the lenders will recover their borrowed money from the sale of mortgaged, pledged or hypothecated assets of the person who has taken the loans. Generally, bank loans are secured loans. Unsecured loans are loans taken without any security. Generally, unsecured loans are taken from relatives or friends. Loan funds are is shown on the liabilities side of the balance sheet. They are part of the sources of funds.

Fixed Assets are the assets which are purchased and used to support in earning revenues. Long term assets are called fixed assets, generally, for more than one year. Generally, fixed assets are used for the purpose of production or they are indirectly connected to support the production or to earn revenue. There are several categories of fixed assets, such as land, buildings, plant and machinery, office equipment, furniture and fixtures, vehicles, computers, software, patents, trade marks, copyrights, designs, live stocks etc. Depreciation is charged on fixed assets. Fixed assets are presented in the balance sheet as Gross Block less Depreciation which is called Net Block, Capital work-in-progress is separately shown in the balance sheet. Fixed assets are shown on the assets side of the balance sheet. They are part of the application of funds.

Investments may be for various purposes. Investments are shown separately in the balance sheet. There are various natures of investments, such as, Investment in shares, Investment in Mutual Funds, Investment in Government Securities, Investment in Debentures, Investment in Bonds, Investment in Immovable Properties, Investment in Partnership Firms, and Investment in Trust Securities etc. Nature of investment and mode of valuation are shown in the balance sheet. Investments are shown on the assets side of the balance sheet. They are part of the application of funds.

Current Assets are the assets for short term in nature, generally for one year. Current assets are assets required for working capital. Current assets are assets required for day-to-day working of the business. There are several types of current assets, such as, Inventories, Sundry Debtors, Cash and Bank Balances, Other Current Assets, Loans and Advances etc. Inventories are stocks required to run a business, without stock, production would be interrupted and there would be chaos in the business so minimum level of stock for every item has to be maintained. Sundry debtors are the consumers of the product or service of the business, product or service is sold to them. Cash and bank balance, loans or advances given or any other short term assets are current assets of the business. Current assets are shown on the assets side of the balance sheet. They are part of the application of funds.

Current Liabilities are the liabilities of the business for a short term, generally up to one year. Liabilities to the suppliers and others which, generally, are payable within a year. Current Liabilities and provisions are two categories for short term liabilities. Current liabilities are shown on the liabilities side of the balance sheet. They are part of the sources of funds.

Difference between current assets and current liabilities is called Net Current Assets or Working Capital.

Miscellaneous Expenditures are such expenditures which are for long term but are not in the nature of fixed assets, they are shown separately on assets side of the balance sheet.

Debit Balance of profit and loss account is the accumulated amount of loss of the business; it is shown separately on assets side of the balance sheet.

Contingent Liability is a type of liability which is probable but not materialized. Occurrence or non-occurrence of contingent liability depends upon some events. They are not part of assets or liabilities side of the balance sheet but they are part of the balance sheet. They are shown as a disclosure at the end of the balance sheet.

Incomes are the inflow of resources or revenues to the business. Sales Revenue is the main income of a business. Other incomes are of several types, such as scrap sales, interest income, dividend income etc.

Expenditures are the outflow of resources from the business. There are several categories of the expenditures, such as material consumption, manufacturing expenditures, excise duty, administrative expenditures, selling expenditures, distribution expenses, depreciation, financial charges etc.

There are certain Fundamental Accounting Assumptions, which are accepted and followed. They are not specifically mentioned anywhere but it is assumed they are accepted and followed. If they are not followed then specific disclosure is required. Going Concern, Consistency and Accrual are the fundamental accounting assumptions.

Notes to Accounts are the significant accounting polices which are being followed while preparation and presentation of the financial statements. Notes to accounts are disclosures of several policies adopted while preparation of financial statements. These policies are for compliance of various applicable laws or compliance of accounting standards. Notes to accounts are of various natures, such as, Basis of preparation of financial statements, Revenue Recognition, Fixed assets and depreciation, Borrowing costs, Investments, Inventories, Foreign currency translations, Retirement benefits, Provisions, Taxes on income, Segment reporting, Earning per share, Cash flow statement, Related party transactions etc. Information on mortgage of assets and bank facilities are also provided in the notes to accounts. Disclosures as per Companies Act, 1956 are also provided in the notes to accounts, such as, managerial remuneration, auditors’ remuneration, quantitative information of raw materials and finished goods of the company, CIF value of imports, expenditure in foreign currency, value of imported and indigenous raw materials consumed and percentage of it to the total value, earning in foreign currency etc.

Accounting Standards (AS) are guidelines to explain the treatment for certain typical issues of accounting. AS are the standards, which are to be followed, while preparation and presentation of financial statements. AS are issued by the Institute of Chartered Accountants of India. In general, AS are mandatory in nature to comply for business and commercial concerns and specifically for listed companies, corporates etc. while preparation of financial statements. The Institute of Chartered Accountants of India issues the accounting standards keeping into account current scenario of economy and business at national and international level. It also issues revised accounting standards keeping into account the changed scenario. The Institute of Chartered Accountants of India has issued several accounting standards, such as, Disclosure of Accounting Polices, Valuation of Inventories, Cash Flow Statements, Contingencies and Events Occurring after Balance Sheet Date, Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies, Depreciation Accounting, Construction Contracts, Revenue Recognition, Accounting for Fixed Assets, The Effects of Changes in Foreign Exchange Rates, Accounting for Government Grants, Accounting for Investments, Accounting for Amalgamations, Employee Benefits, Borrowing Costs, Segment Reporting, Related Party Disclosures, Leases, Earnings per Share, Consolidated Financial Statements, Accounting for Taxes on Income, Accounting for Investments in Associates in Consolidated Financial Statements, Discontinuing Operations, Interim Financial Reporting, Intangible Assets, Financial Reporting of Interests in Joint Ventures, Impairment of Assets, Provisions, Contingent Liabilities and Contingent Assets, Recognition and Measurements of Financial Instruments, Disclosures of Financial Instruments etc.

Accounting standards are required to be followed in order to make unanimity of the financial statements of various entities. Compliance of accounting standards would enable the various users of financial statements, to make a logical comparison of the financial statements so that they can take informed and better economic decisions.

Financial statements & accounting standards

FINANCIAL STATEMENTS & ACCOUNTING STANDARDS

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