Accountancy · Ch 1 — Financial Statements - I
Summary
Summary
- Trading Account shows gross profit/loss: Gross Profit = Net Sales - Cost of Goods Sold, where COGS = Opening Stock + Net Purchases + Direct Expenses - Closing Stock.
- Profit & Loss Account shows net profit/loss: Net Profit = Gross Profit + Other Incomes - Indirect Expenses (office, selling, financial).
- Balance Sheet is a statement of assets, liabilities, and capital on a date, following: Assets = Liabilities + Capital.
- Operating Cycle (for current assets/liabilities classification): cash → raw materials → WIP → finished goods → receivables → cash.
- Adjustments (e.g., closing stock, outstanding/prepaid items, depreciation, bad debts) are recorded via journal entries and affect both the P&L and the Balance Sheet.
- Closing Stock is valued at cost or net realisable value, whichever is lower, and appears as an asset and a credit to the Trading Account.
- Depreciation is a non-cash expense reducing asset value; charged on fixed assets (e.g., straight-line or written-down value method).
- Bad Debts and Provision for Doubtful Debts reduce receivables; new provision is based on a % of debtors after writing off actual bad debts.
- Outstanding Expenses are added to the expense in P&L and shown as a liability; Prepaid Expenses are deducted from the expense and shown as an asset. …