What do you mean by the financial statements of any organisation?

What do you mean by the financial statements of any organisation?

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  1. Organisations are in a position to prepare financial statements as at the end of each financial year and the following are termed as the financial statements for any firm:

    1)   Balance sheet

    2)   Profit and loss account

    3)   Other returns namely; cash flow statement; funds flow statement and schedules attached to the balance sheet and profit and loss account.


    ·         What is a balance sheet ?

    1.   Balance sheet is a statement showing the  business position of an organization as on a particular date.

    2.   Business position means the assets and liabilities

    3.   Assets means what the organization owns and liabilities means what the organization owes to others.

    4.   The balance sheet simply shows the snapshot of its assets and liabilities on any specified date

    5.   Normally balance sheets are prepared for an accounting year and accounting year normally means one year unless and otherwise specified otherwise

    6.   In respect of business concerns in India, the accounting year commences from 1st April to 31st March.


    ·         What is a profit and loss account of an organization ?

    1.   Profit and loss account shows the details of income earned and expenditure incurred by an organization over a period

    2.   Over a period means a specific period – say one year or six months or three months


    ·         What are the different types of income for an organisation?

    1.   There are two types of income – Operating income and non operating income

    2.   Operating income means the income earned by the organization through business operations

    3.   Non operating income means the income earned by the organization other than business organizations.

    4.   In case the company is engaged in manufacturing of leather wallets, the income earned through sale of leather wallets is called as the business income for the organization.

    5.   When the company has invested its surplus funds in shares, deposits etc., and earns some income by way of interest and dividends and such income is called as non operating income because the income has nothing to do with the business income.

    ·         What are the different types of expenditure for an organization ?

    1.   There are two types of expenditure for an organization –Operative expenditure and non operative expenditure

    2.   Operative expenditure means expenditure incurred during the course of business operations

    3.   Non operative expenditure means expenditure incurred other than business expenditure

    4.   For example, the company had invested in shares and they had incurred losses on account of shares at the time of selling such shares in the market. In such a case, the loss incurred will be termed as non operative expenditure


    ·         What are the different types of assets of an organization ?

    1.   Assets of an organization can be classified into two types – Long term assets and short term assets

    2.   Long term assets are also called as  long term applications or long term uses.

    3.   Similarly short term assets are called as current assets

    4.   There are two other types of assets called as– intangible assets and noncurrent assets which are the components of  long term assets

    5.   Tangible assets mean assets which have physical identity and intangible assets do not have any physical identify


    ·         What do you mean by intangible assets ?

    1.   Intangible assets do not have any physical form

    2.   They simply represent some value

    3.   The following are some kinds of intangible assets – miscellaneous expenditure, prepaid expenses, goodwill, patents, copyrights, trademarks etc


    ·         What do you mean by non current assets ?

    1.   Noncurrent assets do not have any participation over the business operations of the organization. They are neither long term in nature nor short term

    2.   Current assets normally mean the assets which are realizable within a period of twelve months or within the accounting period, if it is otherwise stated. Current assets are also called as short term assets or short term uses or short term applications

    3.   As such all other assets other than current assets are called either as long term assets or noncurrent assets

    4.   Investments in shares, debentures and deposits maturing after a period of twelve months are called as noncurrent assets.

    ·         What are the components  of long term assets ?

    1.   Long term assets comprise of the following: Fixed assets namely; land, buildings and machinery.

    2.   Land, buildings and machineries are collectively called as  gross block

    3.   Net block means gross block less depreciation in respect of building, land and machineries


    ·         What are the components of current assets ?

    1.   Current assets comprise the following: Cash, Balance with bankers, stock of goods, sundry debtors, advance paid to suppliers and advance paid to any others


    ·         What the different types of liabilities in a balance sheet ?

    1.   The liabilities are bifurcated into two types – long term liabilities and short term liabilities

    2.   Long term liabilities are in other words called as long term sources


    ·         What are the components of long term liabilities ?

    1.   Long term assets comprise the following: Capital, Reserves, Term loans, subordinated debts etc

    2.   Capital can be bifurcated into: – authorized capital, issued capital, subscribed capital and paid up capital

    3.   Paid up capital will only be taken into account for the purpose of balance sheet and all other details will be for information purposes only as far as balance sheet is concerned

    4.   Reserves can be classified into – Revenue reserves and capital reserves.

    5.   Revenue reserves are accumulated earnings through profit earned through business and non business operations

    6.   Capital reserves are created out of income earned through issue of share capital – eg. Share premium etc. Share premium is an extra income earned by the organization just by floating their shares in the market and the income is not connected with the business operations of the organization

    7.   Dividends can be distributed from out of revenue reserves and not from capital reserves

    8.   There are different types of capital called as  equity capital and preference share capital

    9.   The owners of equity capital are called as equity shareholders and the owners of preference shares are called as preference shareholders

    10.                Equity shareholders have voting rights and preference shareholders do not have any voting rights

    11.                Equity shareholders earn their dividends only when the  organizations declare any dividend as per  the dividend declaration policy of the organisation

    12.                Preference shareholders are entitled to earn a fixed rate of income each year as per the contract entered into by them with the organization

    ·         What are called long term loans ?

    1.   Long term loans are loans which are payable for more than 84 months – I e longer duration loans. Normally long term loans are obtained by the organizations from banks or financial institutions for the purpose of acquiring fixed assets namely; machineries, buildings etc., and in the case of long term loans, wherever the instalments  are payable within a period of twelve months they are treated as short term liabilities

    ·         What do you mean by current liabilities ?

    1.   Current liabilities comprise of the following – Overdraft facilities availed from the bank, sundry creditors, advance payment received from the customers however due for payment during the accounting period, provision for taxes, insurance etc 

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