MBA Class of 2022

Bridge Course Accounting and Finance

Session - 1

Nature and purpose of Accounting

Most of the world’s work is done through organizations – groups of people who work together to
accomplish one or more objectives. In doing its work, an organization uses resources – labor,
materials, various services, buildings, and equipment. These resources need to be financed, or paid
for. To work effectively, the people in an organization need information about the amounts of these
resources, the means of financing them, and the results achieved through using them. Parties
outside the organization need similar information to make judgements about the organization.
Accounting is a system that provides such information.

Accounting has got a very wide scope and area of application. Its use is not confined to the business
world alone, but spread over in all the spheres of the society and in all professions. In the modern
world, in any social institution or professional institution, whether that is profit earning or not,
financial transactions must take place. So there arises the need for recording and summarizing
these transactions when they occur and the necessity of finding out the net result of the same after
the expiry of a certain fixed period.

In the modern world, accounting system is practiced not only in all the business institutions but
also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs,
Co-operative Society etc. and also Government and Local Self-Government in the form of
Municipality, Panchayat. The professional persons like Medical Practitioners, Practicing Lawyers,
and Chartered Accountants etc. also adopt some suitable types of accounting methods. As a matter
of fact, accounting methods are used by all who are involved in a series of financial transactions.

The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As
accounting is a dynamic subject, its scope and area of operation have been always increasing
keeping pace with the changes in socio-economic conditions. As a result of continuous research in
this field the new areas of application of accounting principles and policies are emerged. National
accounting, human resources accounting and social accounting are examples of the new areas of
application of accounting systems.

Nature of Accounting

Accounting is the systematic recording of financial transactions and presentation of the related
information of the appropriate persons. The basic features of accounting are as follows:

1. Accounting is a process: A process refers to the method of performing any specific job step
by step according to the objectives, or target. Accounting is identified as a process as it
 performs the specific task of collecting, processing and communicating financial
information. In doing so, it follows some definite steps like collection of data recording,
classification, summarization, finalization and reporting.
2. Accounting is an art: Accounting is an art of recording, classifying, summarizing and
finalizing the financial data. The word ‘art’ refers to the way of performing something. It
is a behavioral knowledge involving certain creativity and skill that may help us to attain
some specific objectives. Accounting is a systematic method consisting of definite
techniques and its proper application requires applied skill and expertise. So, by nature
accounting is an art.

3. Accounting is means and not an end: Accounting finds out the financial results and position
of an entity and the same time, it communicates this information to its users. The users then
take their own decisions on the basis of such information. So, it can be said that mere
keeping of accounts can be the primary objective of any person or entity. On the other
hand, the main objective may be identified as taking decisions on the basis of financial
information supplied by accounting. Thus, accounting itself is not an objective, it helps
attaining a specific objective. So it is said the accounting is ‘a means to an end’ and it is
not ‘an end in itself.’

4. Accounting deals with financial information and transactions; Accounting records the
financial transactions and date after classifying the same and finalizes their result for a
definite period for conveying them to their users. So, from starting to the end, at every
stage, accounting deals with financial information. Only financial information is its subject
matter. It does not deal with non-monetary information of non-financial aspect.

5. Accounting is an information system: Accounting is recognized and characterized as a

storehouse of information. As a service function, it collects processes and communicates
financial information of any entity. This discipline of knowledge has been evolved out to
meet the need of financial information required by different interested groups.

Purpose of Accounting
The primary purpose of accounting is to provide the information that is needed for
sound economic decision making. The main purpose of financial accounting is to prepare
financial statements that provide information about organization. The following are the main
objectives of accounting.

1. Recording

The fundamental role of accounting is to maintain a systematic, complete, accurate and

permanent record of all transactions of a business which could be retrieved and reviewed whenever
necessary.

2. Planning
Organizations need to plan how they intend to allocate their limited resources (e.g. cash, labor,
materials, machinery and equipment) towards competing needs in the future. An effective way of
doing so is by using various forms of budgets.

Budgeting is a major component of managerial accounting. Budgets enable organizations to plan

ahead by anticipating business needs and resources. Budgeting helps in the coordination of
different segments of an organization.

3. Decision

Accounting helps managers in making a range of business decisions and developing policies to
make the organizational processes more efficient. Examples of management decisions that are
based on accounting information include:
 How much price should be charged for products and services to achieve maximum profit;
 Which products should be produced in case of shortage of resources such as cash, labor or
material in order to maximize profit;
 Whether a business needs to acquire financing;
 Whether an business should invest in a business opportunity;
 Whether a business should discontinue a product that is under-performing;
 Whether a business should offer credit to a certain customer.

4. Performance

Accountancy helps in determining how well a business is performing by summarizing the financial
information into quantifiable measures (e.g. sales revenue, profit, expenses, etc.).

It is important for organizations to have a reliable source of measuring their key performance
indicators so they could improve by comparing themselves against their past performance as well
as against competitors.

5. Position

Financial statements show the financial position of a business. Financial position reflects the
financial condition of a business at that time and shows for example:
 How much capital has been invested in the business
 How have the funds been utilized in the business
 The cumulative profit or loss of the business
 How much the business owes to others (i.e. liabilities)
 The amount of cash, inventory, machinery and other assets owned by the business
6. Liquidity

Mismanagement of cash is often the reason for failure in many businesses. Accounting helps
businesses in determining how much cash and other liquid resources are at its disposal to pay for
its financial commitments. This information is necessary for working capital management and
helps organizations to reduce the risk of bankruptcy through the timely detection of financial
bottlenecks.

7. Financing

Accounting information is necessary in securing finance. Whether an organization applies for a

bank loan or an investment by shareholders, it will be required to provide historic financial
record (e.g. profit or loss for past five years) as well as financial projections (e.g. forecast sales for
the next 3 years). In many cases, such information will be required by the financiers to be verified
by external accounting experts known as auditors.

8. Control

One of the key objectives of an accounting system is to place sufficient internal controls within an
organization for the safeguarding of its valuable resources. Assets of a business (e.g. cash,
buildings, inventory, etc.) are susceptible to losses arising from theft, fraud, error, obsolescence,
damage and mismanagement. Accounting ensures that such risks are reduced to an acceptable level
by placing various checks across the organization. For example, accounting policy of an
organization may require payments above a certain threshold to be approved by a senior member
of management to ensure the accuracy and minimize the risk of fraudulent payment.

9. Accountability

Accounting provides a basis for performance assessment of a business over a period of time
which promotes accountability across several tiers of an organization.

Shareholders can ultimately hold the directors responsible for the overall performance of their
company on the basis of accounting information published in the financial statements.

10. Legal

Accounting is a legal requirement for most businesses. Law requires businesses to maintain an
accurate financial record of their transactions and to report their financial results to shareholders,
tax authorities and regulators.

Accounting also helps organizations to determine their financial rights and obligations accurately
by recording the correct amounts of payables, receivables, payments, and receipts.

11. Users

Role of accounting is not just limited to the information needs of employees and investors of a
business. Accounting, fulfills the information needs for a diverse group of stakeholders such as -
Management
Shareholders and Security Analysts
Lenders
Suppliers
Customers
Government and Regulatory Authorities

Financial Accounting and Management Accounting information

Financial accounting information is intended both for managers and also for the use of parties
external to the organization, including shareholders (and trustees in non-profit organisations), to
banks and other creditors, government agencies, investment advisers, and the general public.
Further, the parties connected with the organization do not have time to examine the details of the
operating information. Instead, they rely on summaries of this information. They use these
summaries, together with other information, to carry out their management responsibilities. The
accounting information specifically prepared to aid managers is called management accounting
information. This information is used in three management functions: 1. Planning, 2.
Implementation and 3. Control.

Although accounting is a staff function performed by accounting professionals within an

organization, the ultimate responsibility for the generation of accounting information - financial
or managerial - rests with management. Management’s responsibility for accounting is the reason
that one of the top officers of many businesses is the controller. The controller’s responsibility is
to satisfy the needs of other managers related to management accounting information and comply
with the requirements of financial reporting. For proper flow of such information, the controller’s
office employs accounting professionals in both management and financial accounting. These
accountants design, install and operate the information systems required to generate financial and
managerial reports.

Definition of Accounting

It is an art of recording or noting the facts of financial transactions in simple and easy to understand
way. This forms the basis to measure the operating performance of the business and to analyze the
financial position of the business.

“Accounting is the process of identifying, measuring and communicating economic information

so that they can make informed judgments and decisions”. Accounting as a function is related to
all the functions in an organization like planning, implementation, marketing, control, etc. This
wide range of involvement of accounting as a function increases the scope of accounting as a
profession. Accounting professionals are responsible for preparing and finalizing the financial
statements.

“It is a systematic process of identifying, recording, measuring, classifying, verifying,

summarizing, interpreting and communicating financial information. It reveals profit or loss for a
given period, and the value and nature of a firm's assets, liabilities and owners' equity.”
All these steps involved in the process of accounting will be covered in Accounting cycle.

Sessions – 2 & 3

Overview of Financial Statements

Financial statements are formal records of the financial activities and the position of the business.
Relevant financial information is presented in a structured manner and in a form which is easy to
understand. These are the written reports that quantify the financial strength, performance and
liquidity of a business. Investors and financial analysts rely on the financial data to evaluate and
analyze the financial health and earnings potential of the business and make predictions about its
future direction.
There are two major financial statements prepared by all business firms, which are:
The balance sheet and
The income statement

The balance sheet provides an overview of assets, liabilities and owners’ equity as a snapshot in
time. The income statement conveys details of profitability of the financial results of the business
activities. In order to prepare these statements, certain rules are to be followed. These rules are the
accounting principles and concepts.

Introduction to Accounting Principles

Accounting principles are uniform practices which entities follow to record, prepare and present
the financial statements. Any business organization must prepare its financial statements as per the
acceptable accounting principles in order to present true and fair view of state of affairs of the
business. The word principle is here used in the sense of a general law or rule that is to be used as
a guide to action. The accounting principles are built on a few assumptions called as accounting
concepts, which guide accountants in recording and reporting financial information. There are
thirteen accounting concepts, which find wide acceptance across the world by accounting
professionals and auditors.
Whilst there are currently no universally standardized accepted accounting principles, there are
various accounting frameworks which set the standard body. The most common accounting
principle frameworks used are GAAP, IFRS and Ind-AS.

Basic Accounting Concepts: The Balance Sheet

The Money Measurement Concept
The Entity Concept
The Going-Concern Concept
The Cost Concept
The Dual-Aspect Concept

Basic Accounting Concepts: The Income Statement

The Accounting Period Concept
The Conservatism Concept
The Realization Concept
The Matching Concept
• Consistency Concept
• Materiality Concept
• Accrual Principle
• Full disclosure principle

Money measurement concept

All transactions are recorded through a common denominator, namely the monetary unit. Thus, if
a certain event, which cannot be measured in monetary terms, no matter how significant it is for
the health of or even existence of the business, cannot be recorded in accounts. For example, the
purchase of an inconsequential asset such as tables and chairs, which is easily measured in rupee
terms, is accounted for in the business. However, the retirement or death of the Chairman of a
company has far reaching consequences for the health of the business. It is not accounted for, since
no monetary measurement of the event is feasible.

The Entity Concept

The legal entity of a corporate business is distinct from the entity of its owners and managers and
people understand it well. Less understood, however, is that the accounting entity of a business is
distinct from its owners. For example, for many purposes, legal entity of a sole proprietary business
may not be very distinct from the entity of the proprietor himself. However, the business entity
concept requires that this should not come in the way of treating the business as a distinct
accounting entity for the purposes of treating transactions relating to the operations of the business.
It is in accordance with this concept that when an owner brings capital into the business, the
business in turn is deemed to owe the capital to the owner. Again, coming to the business between
the sole proprietary concern and its sole proprietor, usually the proprietor may not pay himself a
salary, even when he works for his business. However, in accordance with the business as a
separate entity, his position as an owner must not come in the way of his charging a salary to the
business for the services rendered by him. This is because (as far as the business is concerned) the
service rendered cannot be regarded cost free. The reward of ownership is to be manifested only
in the form of profit, which must be arrived at after charging ‘all costs.

Going concern concept

A business entity is assumed to carry on its operations forever. Even if all the members of the
management die, the concern will continue to exist. Going concern concept implies that the
resources of the concern should be used for the purposes for which they are meant to be used. This
concept implies that the land, buildings, machinery, etc., which are required for carrying out the
production and selling of certain products, would continue to be with the concern for a long time.
Cost concept
Cost concept implies that in accounting, all transactions are generally recorded at cost, and not at
market value. For example, if a piece of land is acquired for Rs. 2 lakh, it would continue to be
shown in the balance sheet at Rs. 2 lakh, even when the market value of the land rises to say Rs.5
lakhs. The cost concept is closely related to going concern concept. If the land is acquired for the
operations of the business and would continue to be used for its operations and would not be sold
shortly, then it is largely immaterial what the land’s market value is, since it is not going to be sold
anyway. Thus, it is consistent with going concern concept to keep recording the land at cost i.e.
Rs.2 lakhs on an ongoing basis.

Duality concept
This concept states that for every transaction, there will be two aspects. For example, when capital
is introduced into the business, there is a cash inflow and capital forms a liability and the cash
inflow is an asset. Similarly, when an equipment is purchased for cash, the new asset comes in
(use of fund), and the cash will decrease (source of fund). Or when the equipment is purchased for
credit, the new asset comes in (use of fund) and a liability will occur (source of fund). So, for every
transaction, there are two aspects. In effect, all the transactions affect the basic equation given as
under: Owners’ equity + Outside liability = Assets.

Accounting period concept

To be able to prepare the income statement for a business, the period for which it is to be prepared
must first be specified. An accounting period may be a calendar year or a financial year. In some
businesses, such as trading, the operating period may be relatively small, say a month or even less,
while in other cases, it may stretch well beyond a year. Under the Companies Act, a company is
normally not permitted to have the accounting period extending beyond fifteen months.

Accrual principle
The accrual principle is the concept that you should record accounting transactions in the period
in which they actually occur, rather than the period in which the cash flows related to them occur.
The accrual principle is the most fundamental requirement of all accounting frameworks, such as
Generally Accepted Accounting Principles and International Financial Reporting Standards. This
principle requires recording revenues when they are earned and not when they are received in cash.
Similarly, it also requires recording expenses when they are incurred and not when they are
actually paid for. Thus, accrual accounting gives the business a means of tracking its financial
position more accurately. At the end of the period, the business will be able to recognize all those
revenues earned and expenses consumed during the period, whether or not the actual cash amounts
have been received or paid.
Matching concept
In order to determine the profits or losses accrued in an accounting period, the expenses must relate
to the goods or services sold during the period. The expenses incurred in the production of goods
and services should be matched with the revenues realized from the sale of the goods and services.
Realization concept
Revenue is the gross inflow of cash, receivables or other consideration arising from the sale of
goods, from rendering services and from holding assets. When to recognize this revenue (the stage
or time) becomes critical for the determination of the income of an entity. For example, sale of
goods involves many stages such as acceptance of order, the stage of commencement of the work
for the specified order, delivery of goods after completion of the work, invoicing, actual receipt of
the money. At which time, would one say that revenue is recognized? The realization concept
removes the ambiguity on this front. Revenue is to be recognized when the sale actually takes
place i.e., the title to the goods is transferred and accepted by the buyer, and there exists a
reasonable certainty of receiving a return consideration in the future. Revenue for service
transactions is generally recognized on performance of service. Thus, revenue can only be
recognized after it has been earned.

Conservatism concept
The idea behind this concept is that recognition of revenue requires better evidence than
recognition of expenses. This concept emphasizes that revenues are recognized only when they
are reasonably certain and expenses are to be recognized as soon as possible. For example, a sales
manager might have finalized a deal with his client for a sale of 100 units of a product. But, unless
these items are produced and delivered to the client, there is no reasonable certainty about receiving
the payment for these 100 units. It is only thereafter that he can record the sales amount on those
100 units as due from the client. But on the other hand, if we come to know that a customer has
lost all his assets and is likely to default payment, then we should immediately either make
provision for such loss or write them off.

Materiality concept
All financial transactions need to be recorded in the books of accounts. However, there may be
transactions which may be insignificant and are not shown separately. They are usually clubbed
with others. There is no agreement as to the exact line separating material events from
immaterial events. The decision depends on judgment and common sense. Financial information
of a company is considered to be material from the point of view of the preparation of the
financial statements. If the information has the potential to alter the view or opinion of a
reasonable person, then it would be treated as material information and disclosed separately, if
not, the information would be treated as insignificant and will be clubbed with other similar type
of information.
Consistency concept
The consistency concept means that the accounting methods once adopted must be applied
consistently in future. It requires that once an entity has decided on using one method, it will
treat all subsequent events of the same character in the same fashion unless it has a sound reason
to change the method of treatment of that subsequent event. For example, if a concern is
charging depreciation by one method it is expected to follow the same method in the subsequent
years also. So, if for any valid reasons the accounting policy is changed, the business must
disclose the nature of change, the reasons for the change as well as its effects on the items of
financial statements.

Full disclosure principle

A disclosure is additional information attached to the financial statements of a business, usually as
explanation for activities which have significantly influenced its financial results. In cases where
any internal financial information will have significant influence on the understanding and
interpretation of the results of the business, under the full disclosure principle, it becomes
mandatory for the businesses to disclose such internal financial information with the outside world.
If such information is not disclosed, it is treated as manipulation of the financial statements which
will mislead users of the financial statements in making any important decisions.
Thus, the full disclosure principle is a concept that requires a business to report all necessary
information about their financial statements and other relevant information to any persons who are
accustomed to reading this information. It ensures that the readers and users of the financial
information of a business are able to make informed decisions regarding the company and do not
get misled by any lack of information.

Session 4 – Accounting Records and Systems

Bookkeeping

Though we are not considered here with bookkeeping procedures, it is important to understand and gain
some knowledge about recordkeeping fundamentals. It is also important to understand the debit and credit
mechanism. In accounting, the device called an account is used for calculating net change. The simplest
form of account is called as T account looks like below.
Debit and Credit

The left-hand side of any account is arbitrarily called the debit side, and the right-hand side is called the
credit side. Amounts entered on the left-hand side are called debits, and amounts entered on the right-hand
side are called credits. The verb to debit means to make an entry in the left-hand side of an account, and the
verb to credit means to make an entry in the right-hand side of an account.

Permanent Accounts and Temporary Accounts

The accounts maintained for the various items on the balance sheet are called permanent or real accounts.
These accounts disclose the company’s real worth at the time the balance sheet is created. The balances of
these accounts are never closed or transferred to the company’s capital account. The following are the types
of accounts are treated as permanent accounts.
Asset accounts: The tangible and intangible assets that the company owns are asset accounts. Assets include
cash, land, buildings, furniture, goodwill and other items.
Liability accounts: The accounts show debts that the company owes to its creditors. Liabilities include
accounts payable, loans payable, interests payable, bonds payable, wage and income tax.
Owner’s equity accounts: These are the accounts that show the investment that the company’s owners have
made in the business.

A temporary account is created for each revenue and expense item that will appear on the income statement.
Thus there are temporary accounts for sales revenue, cost of sales, selling expenses etc., The purpose of
temporary accounts is to show the revenues, expenses and withdrawals (owner’s drawing) that affect the
owner’s equity in that accounting period.

Accounting Cycle

The stage from identification of transactions to preparation of adjusted trial balance is called ‘Accounting
Cycle’.

The following figure depicts the accounting process:

The Accounting Process

Source: ICFAI Research Center

The first step in the accounting process is to identify the external transactions and events affecting the
accounting equation.

The second step involves the documentation of the events and transactions identified in the first step.
Documentation is the mechanism used to capture essential information regarding each transaction. The
source documents such as sales invoices, bills from suppliers, cash memos are generated which provide
complete evidence of the transactions and events affecting the business.

The third step is to record the transaction in the Journal. Journal provides a chronological record of all
economic events affecting a firm. This is dealt with in detail in the subsequent part of this unit.

The fourth step in the process involves the transfer of debits and credits recorded in the Journal entries to
specific accounts or individual accounts in the Ledger. This process is called posting.

The fifth step in the accounting process entails the preparation of Unadjusted Trial Balance. This is simply
a list of individual accounts appearing in the Ledgers and their balances on a particular day. Its purpose is
to check for completeness and to prove that the sum of the accounts with debit balances equals the sum of
the accounts with credit balances, that is, the accounting equation is in balance.

Along with adjusting entries, the sixth step may also involve passing of rectification entries to rectify any
accounting errors that may have been committed during the previous stages. Such rectification entries, in
case of one-sided errors can be passed using a temporary account called “Suspense account”.
The seventh step in the accounting process involves the preparation of Adjusted Trial Balance. This step is
undertaken after the adjusting entries and the rectification entries have been posted to the accounts involved.

The above seven steps in the accounting process facilitate the preparation of financial statements. The
financial statements are the output of the accounting process and are the means of communicating financial
information to external users.

Session-V Structure and Format of Financial Statements

Content
5.1. Introduction
5.2. Components of Financial Statements
5.3. Relationship between the Balance Sheet and Income Statement
5.4. Annual Reports
5.5. Format of Financial Statements

5.1. Introduction
The end product of the financial accounting process is a set of reports that are called financial
statements. Financial statements are a structured representation of the financial position and
financial performance of an entity.
The objective of financial statements is to provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a wide range of users in making
economic decisions.
Financial statements also show the results of the management’s stewardship of the resources
entrusted to it. To meet this objective, financial statements provide information about an entity’s:
[Indian Accounting Standard (Ind AS 1)]
(a) assets;
(b) liabilities;
(c) equity;
(d) income and expenses, including gains and losses;
(e) contributions by and distributions to owners in their capacity as owners; and
(f) cash flows.
Assets: An entity needs cash, equipment, and other resources in order to operate. These resources
are assets. Assets are valuable resources owned by the entity. The common characteristic possessed
by all assets is the capacity to provide future services or benefits.
Liabilities: Liabilities are obligations of the entity to outside non-owner parties who have
furnished resources. Liabilities are claims against assets.
Owner’s equity: the ownership claim on total assets is the owner’s equity. It is equal to total assets
minus total liabilities.
Revenues: Revenues are the gross increase in owner’s equity resulting from business activities
entered into to earn income. Generally, revenues result from selling merchandise, performing
services, renting a property, and lending money. Common sources of revenue are sales, fees,
services, commissions, interest, dividends, royalties, and rent.
Expenses: Expenses are the cost of assets consumed or services used in the process of earning
revenue. They are decreases in owner’s equity that result from operating the business.
Contributions by and distributions to owners in their capacity as owners: contribution by
owners is called capital and distributions to owners is known as a dividend. Sometimes, a part of
the profit or entire profit retained by a company is known as retained earnings.
Cash Flows: Cash flows provides information about the cash inflows (receipts) and outflows
(payments) for a specific period.
5.2. Components of Financial Statements
A complete set of financial statements comprises:
(1) The balance sheet as at the end of the period;
(2) Statement of profit and loss for the period;
(3) Statement of changes in equity for the period;
(4) Statement of cash flows for the period;
(5) Notes, comprising significant accounting policies and other explanatory information;
 Most reports, in any field, can be classified into one of two categories: (1) stock, or status,
reports, and (2) flow reports.
 One of the accounting reports, the balance sheet, is a report of stocks. It shows information
about the resources and obligations of an organization at a specified moment of time.
 The other two reports, the income statement and the cash flow statement are reports of
flows. They report activities of the organization for a period of time, such as a quarter or a
year.
5.2.1. Balance Sheet (stock reports)
 It is also called as ‘Statement of Financial Position’. It depicts the financial position of a
company on a date.
 It gives information about how the company has been financed and how that money has been
invested in various productive resources.
 A company can obtain finance from owners and outsiders. Thus, the balance sheet has three
major sections viz., assets (i.e., the resources of the company), liabilities (i.e., the debts of
the company), and shareholder’s equity (i.e. the amount invested by owners).
 At any time, the total number of assets must be equal to the amount invested by owners and
creditors. The balance sheet is based upon the fundamental accounting equation of
Assets = Liabilities + Equity
5.2.2. Statement of profit and loss (Flow reports)
 It is also called as ‘Income Statement’. It indicates the amount of net income or loss obtained
by the company during a period.
 Net income is the excess of revenues over its expenses, and the net loss is the excess of
expenses over its revenues.
 It gives the summarized operating information about the sales, costs, incomes, profits, and
losses of the company during a particular period.
 It is the best measure to assess the profitability and performance of the company.
Revenues – Expenses = Net Income
5.2.3. Statement of cash flows [Ind AS 7] (Flow reports)
 It is also called as ‘Cash Flow Statement. It reports the amount of cash collected and paid
out of a company on operating, investing, and financing activities.
 The preparation of this statement is obligatory in most of the countries.
 In India, preparation of cash flow statement is mandatory for all companies whose debts and
securities are listed in recognized stock exchanges and for all other commercials, industrial
and business reporting enterprises, whose turnover for the accounting period exceeds 50
crores.
5.2.4. Foot Notes (Notes to Accounts)
 The notes to the financial statements provide detailed information on some of the figures in
the balance sheet or profit and loss account.
 They may also contain a statement on different accounting policies followed by the
company, information about the contingent liabilities (i.e., liability may or may not arise in
the future), commitments to honor future contracts.
 They are the best means to convey the non-accounting information.

5.3. Relationship between the Balance Sheet and Income Statement

 The relationship between balance sheet and income statement is that the profit of the business
shown in the income statement, belongs to the owners and this is shown by a movement in
equity between the opening and closing balance sheets of the business.

 The connection between the balance sheet and the income statement results from the use of
double-entry accounting or bookkeeping, and the accounting equation (Assets =
Liabilities + Owner's Equity)

 Basically, the income statement components have the following effects on the owner's
equity:
  Revenues and gains cause owner's (or stockholders') equity to increase
 Expenses and losses cause the owner's (or stockholders') equity to decrease
Assets= Liabilities + Owner’s equity + Income/gain – Expenses/losses
5.4. Annual Reports
 The annual report that s company prepares for the use of shareholders, financial analysts,
and other outside parties contain important information in addition to the three primary
financial statements.
 At its option, a company may include information about products, personnel, facilities,
environmental protection practices, or any other topic. Often, this information is
accompanied with color photographs and diagrams of various kinds.
 A listed company is required to provide certain other types of information, including the
auditor's opinion, notes to the financial statements, management’s discussion, and analysis,
operating segment information, and certain comparative data for previous years.
5.5. Format of Financial Statements
Generally, financial statements are prepared in a certain format. But the format is not the same for
all types of business. Generally, public companies other than banking, insurance, and electricity
companies, must prepare their financial statements based on the provisions in Schedule III of the
Companies Act, 2013. Following is a brief explanation about the form and contents of financial
statements. You will learn these statements in detail in later units.

PART I — BALANCE SHEET

Name of the Company…………………….
Balance Sheet as at ………………………
(Rupees in…………)
Particulars Note Figures as at the Figures as at the
No. end of current end of the previous
reporting period reporting period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share
warrants
(2) Share application money pending
allotment
(3) Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long-term provisions
(4) Current liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
TOTAL
II. ASSETS
Non-current assets
(1) (a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under
development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL

PART II – STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….
Profit and loss statement for the year ended ………………………
(Rupees in…………)
Figures as at the
Figures as at the
Note end of the
Particulars end of current
No. previous
reporting period
reporting period
1 2 3 4
I Revenue from operations xxx xxx
II Other income xxx xxx
III Total Revenue (I + II) xxx xxx
IV Expenses:
(a) Cost of materials consumed Xxx Xxx
 (b) Purchases of Stock-in-Trade
(c) Changes in inventories of finished goods Xxx Xxx
work-in-progress and Stock-in-Trade
(d) Employee benefits expense Finance costs Xxx Xxx
(e) Depreciation and amortization expense
(f) Other expenses

Total expenses xxx Xxx

V Profit before exceptional and extraordinary xxx xxx

items and tax (III - IV)
VI Exceptional items xxx xxx
VII Profit before extraordinary items and tax (V - xxx xxx
VI)
VIII Extraordinary items xxx xxx
IX Profit before tax (VII- VIII) xxx xxx
X Tax expense:
(1) Current tax Xxx Xxx
(2) Deferred tax Xxx Xxx
XI Profit (Loss) for the period from xxx xxx
continuing operations (VII-VIII)
XII Profit/(loss) from discontinuing operations xxx xxx
XIII Tax expense of discontinuing operations xxx xxx
XIV Profit/(loss) from Discontinuing operations xxx xxx
(after tax) (XII-XIII)
XV Profit (Loss) for the period (XI + XIV) xxx xxx
XVI Earnings per equity share:
(1) Basic Xxx Xxx
(2) Diluted xxx xxx

Part III: Statement of retained Earnings

Company Name
Statement of Retained Earnings
For the year ended December 31, 2019
Particulars Amount (Rs)
Retained earnings at the beginning of the period XXXX
Add: Net Income (or less: Net loss) XXXX
Less: Dividends (XXXX)
Retained earnings at end of the period XXXX

PART IV: STATEMENT OF CASH FLOWS (IND AS 7)

Indirect method Rs Rs

Net profit before Tax and extra ordinary Items xxx

Cash flow from Operating activities

Add: Non-cash and non-operating Items which have already

been debited to profit and Loss Account like;

 Depreciation xxx

 Amortisation of intangible assets xxx

 Loss on the sale of Fixed assets xxx

 Loss on the sale of Long-term Investments xxx

 Provision for tax xxx

 Dividend paid xxx xxx

Less: Non-cash and Non-operating Items which have already

been credited to Profit and Loss Account like

 Profit on sale of fixed assets (xxx)

 Profit on sale of Long term investment (xxx) (xxx)

 Operating profit before working Capital changes (A) xxx

 Changes in working capital:

Add: Increase in current liabilities xxx

 Decrease in current assets xxx xxx

 Less: Increase in current assets (xxx)

 Decrease in current liabilities (xxx) (xxx)

Net increase / decrease in working capital (B) xxx

Cash generated from operations (C) = (A+B) xxx

Less: Income tax paid (Net tax refund received) (D) (xxx)

 Cash flow from before extraordinary items (C-D) = (E) xxx

 Adjusted extraordinary items (+/–) (F) xxx

Net cash flow from operating activities (E+F) = (G) xxx

Cash flow from Investing activities

 Proceeds from sale of fixed assets xxx

 Proceeds from sale of investments xxx

 Purchase of shares/debentures/fixed assets (xxx)

Net cash from investing activities (H) xxx

 Cash flow from Financing activities

 Proceeds from issue of shares xxx

 Proceeds from issue of debentures xxx

 Payment of dividend (xxx)

Net cash flow from financing activities (I) xxx

Net increase in cash and cash equivalents (G+H+I) = (J) xxx

Cash and cash equivalents and the beginning of the period (K) xxx

Cash and cash equivalents and the end of the period (J+K) xxx