Financial statements.

Introduction
• The financial statement helps to
measure the performance of the
business by calculating the profit
earned and loss incurred by the
business and measuring the financial
position of the business.

Objectives
 Define and implement Trading account
 Define and implement Profit & loss account
 Use Information Systems for Financial
Accounting

TRADING ACCOUNT
An account held at a financial institution and
administered by an investment dealer that the
account holder uses to employ a trading
strategy rather than a buy-and-hold
investment strategy.
Or
An account similar to a traditional bank account,
holding cash and securities, and is
administered by an investment dealer.

Below is an eg of trading account of
XYZ RECREATIONAL CLUB.

Why is trading account prepared?
• Trading a/c is created to calculate the gross
profit or gross loss incurred by the business.

Uses
• A trading account is appropriate in any case
where a business buys and sells goods.
for example. a shopkeeper.
• A trading account is not appropriate where
only services are provided.
for example. a taxi driver.
Where the purchase of goods is an necessary,
although one may incidental part of providing
a service a trading account is not be sent in.

For example:
• A plumber has to buy many kinds of materials for
his job, such as pipes, fittings, solder. He may
arrange with his customers to buy pieces of
equipment, for example a boiler, which he
supplies and fixes. Although his customers would
pay for the cost of these and there may be some
profit, that is not the main function of his job,
and he may choose not to show this in a separate
trading account. All his business activities would
then be shown in a profit and loss account. If he
sells any materials for the purchaser to use or
resell, a trading account is required.

Contents-
• Trading a/c consist of dr(debit)side and cr(credit) side
balance.
• List of Items to be posted on Debit and Credit side of
Trading Account
• Here is the list of items which is to be posted on the
debit side and credit side of the trading account of the
company –
• Debit side of trading account
• 1. Opening stock
• 2. Purchase – It includes cash and credit purchases of
goods, purchase return is deducted from gross
purchases.

Credit side of trading account
• 1. Sales – It includes cash and credit sales and
sales return is deducted from gross sales
• 2. Closing stock – the stock lying unsold at the
end of the accounting year is called as “Closing
stock”
• the closing stock of current year is will be the
opening stock of next year.
• 3. Gross Loss – If company makes loss then it is
shown on credit side of trading account.

3. Direct Expenses – Direct expenses
includes all the expenses which are
directly attributable to the purchase
of goods like wages, carriage
inward, manufacturing expenses
etc….
4. Gross Profit – If company makes
profit then it is shown on debit side
of trading account.

Defining and Implementing a Profit
and Loss Account
The result shown by the trading account is not
sufficient to determine the net profit earned by
the organization. Therefore, the accounts
department of the organization prepares the
profit & loss account. The information
determined by the profit & loss account is used
by the organization to control its expenses.

A Profit & loss Account is used to
provide the following information:
 Provide information of the net profit or loss.
 Enable comparison of current year’s profit
with the previous year’s profit.
 Exercise control over expenses by comparing
the expenses of the current year with those of
the previous year.

• Equation:
• Net profit/Net loss = ( Gross profit/Gross loss
- Indirect expenses
+ Non-sales income)

• The components are divided into:
• Indirect Expenses:
1. Selling and Distribution Expenses
2. Administration and Office management
expenses
3.Financial Expenses
• Non-sales Income:
1. Depreciation
2. Deferred revenue expenditure

Particulars Amount ($)
Salaries 3,000
Rent 4,000
Discount allowed 400
Advertising 5,000
Freight outwards 4,000
Discount received 500
Sharp Clothing Company earned a gross profit of $ 23,700.
The following information is provided :
The Accountant of the company has to prepare the Profit & Loss account.

Particulars Amount Particulars Amount
To Salaries
To Rent
To Discount Allowed
To Advertising
Expenses
To Freight Outwards
To Net Profit
transferred to
Capital/Equity Account
3,000
4,000
400
5,000
4,000
7,800
By Gross Profit
transferred from
Trading account
By Discount Received
23,700
500
24,200 24,200
Profit & Loss account of Sharp Clothing
For the year ending March 31,2004
Dr. Cr.

Using Information Systems for
Financial Accounting
There are two drawbacks of creating financial
statements manually. First, it takes lot of time to
prepare the accounts books and then to post the
entries to the respective sides of the financial
statements. Secondly, the financial statements
generated may not be accurate.
To overcome these drawbacks, an organization
can use an Accounting Information Systems(AIS).
AIS is an automated way to implement the
accounting process.

Accounting Information System
An organization needs to perform several
finance-related business activities and make
important financial decisions to satisfy its
customers and improve its performance. To
achieve these goals, an organization can use
AIS, which is a type of a data processing
systems that collects data from various
sources, processes that data, and generates
information to perform tasks.

Components of AIS
The components of an AIS include data
, hardware, software, network, workforce, and
the Graphical User Interface(GUI).

Benefits of AIS
An AIS accepts financial and non-financial
transactions as inputs. It also helps the
decision-makers by organizing these
transactions.
 Providing efficiency and reliability
 Ensuring accurate reporting
 Generating error-free financial statements

Types of AIS
An organization can use AIS for achieving long
term goals, making financial budgets, and
maintaining the financial performance of the
organization. The most commonly-uses AISs
are:
 Tally
 Navision

CONCLUSION
 The main objectives of financial accounting is
to report business performance.
 Financial statements can help analysts to
assess the business performance of an
organization. Its indicate whether the business
has earned a profit or incurred a loss.
 Its helps to implement Information systems for
creating accurate financial statements.

Financial statements.

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