Q.Give the Performa of income statement and balance in vertical form.
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Financial Reporting Objectives
Financial Reporting Objectives — A First Look
Imagine you run a small chai stall. At the end of the day, you count the cash, note how many cups you sold, and roughly know if you made a profit. That’s your own mental report. Now imagine you have a partner, a bank that lent you money, and the government wants its share of tax. Each of them needs a clear, honest, and standardised picture of your business — not just your word for it. That’s what financial reporting does: it communicates the financial health of a business to people who have a stake in it.
The Precise Meaning
Financial reporting is the process of preparing and presenting financial statements — the Profit & Loss Account, the Balance Sheet, and the Cash Flow Statement — along with notes and disclosures. Its objective is to provide information that is useful for making economic decisions. That means showing:
- What the business owns (assets) and owes (liabilities)
- How much profit or loss it earned over a period
- Where cash came from and where it went
- Changes in owners’ equity (capital, reserves, drawings)
The ultimate goal is accountability — the business must report to its owners, creditors, investors, and the government. In India, this is guided by the Companies Act, 2013, and Accounting Standards (AS) issued by the ICAI.
Why It Matters
Without financial reporting, no one outside the business can trust its numbers. A bank won’t lend, an investor won’t buy shares, and the tax department can’t assess your tax. For a Class 12 student, think of it this way: you are learning the language that businesses use to speak truthfully about their money. Every journal entry, every ledger, every trial balance — it all leads to these reports.
Accounting Treatment — The Journal Entries
Financial reporting itself is not a single transaction. It is the output of all the accounting done during the year. However, the closing entries that prepare the books for reporting are crucial. Here’s how they work:
1. Transferring Revenue and Expenses to Profit & Loss Account
At year-end, all revenue accounts (like Sales, Interest Income) and expense accounts (like Rent, Salary) are closed.
Journal Entry:
Date Particulars Debit (₹) Credit (₹) Mar 31 Sales A/c Dr 5,00,000 To Profit & Loss A/c 5,00,000 (Being revenue transferred to P&L) Mar 31 Profit & Loss A/c Dr 3,20,000 To Rent A/c 40,000 To Salary A/c 1,80,000 To Depreciation A/c 1,00,000 (Being expenses transferred to P&L)
2. Transferring Net Profit to Capital Account
After all revenues and expenses are closed, the Profit & Loss Account shows either Net Profit (credit balance) or Net Loss (debit balance). This is transferred to the Capital Account (for sole proprietorship) or to the Profit & Loss Appropriation Account (for partnership/company).
For Net Profit (Sole Proprietorship):
Date Particulars Debit (₹) Credit (₹) Mar 31 Profit & Loss A/c Dr 1,80,000 To Capital A/c 1,80,000 (Being net profit transferred to capital)
For Net Loss:
Date Particulars Debit (₹) Credit (₹) Mar 31 Capital A/c Dr 60,000 To Profit & Loss A/c 60,000 (Being net loss transferred to capital)
3. For a Partnership Firm — Profit & Loss Appropriation Account
Partnerships use an Appropriation Account to show how profit is distributed among partners (interest on capital, salary, commission, and finally share of profit).
Interest on Capital = Capital × Rate × Time
Example: A partner has ₹2,00,000 capital, interest is 10% p.a., for one year.
Interest = 2,00,000 × 10/100 × 1 = ₹20,000
Journal Entry for Interest on Capital:
Date Particulars Debit (₹) Credit (₹) Mar 31 Profit & Loss Appropriation A/c Dr 20,000 To Partner’s Current A/c 20,000 (Being interest on capital allowed)
In vertical form, the Income Statement is arranged in a single column running from sales down to net profit, and the Balance Sheet lists Sources of Funds and Application of Funds one below the other.
Income Statement (vertical) — Net Sales − Cost of Goods Sold = Gross Profit; Gross Profit + Other Incomes − Operating & Other Expenses = Net Profit. …
The vertical form shows the income statement in one running column (net sales down to net profit) and the balance sheet as Sources of Funds set equal to Application of Funds, which is easier to read and compare year to year.
Proforma — Income Statement (vertical form) for the year ended ......
| Particulars | Amount (₹) | Amount (₹) |
|---|---|---|
| Net Sales (Sales − Sales Returns) | XXX | |
| Less: Cost of Goods Sold (Opening stock + Net purchases + Direct expenses − Closing stock) | XXX | |
| Gross Profit | XXX | |
| Add: Other Incomes (discount received, commission, interest) | XXX | |
| Less: Operating Expenses (office, selling, distribution) | XXX | |
| Less: Non-operating Expenses (interest, depreciation) | XXX | (XXX) |
| Net Profit | XXX |
Proforma — Balance Sheet (vertical form) as at ......
| Particulars | Amount (₹) | Amount (₹) |
|---|---|---|
| I. Sources of Funds | ||
| Owner's Capital (Opening + Net profit − Drawings) | XXX | |
| Long-term Liabilities (loans) | XXX | |
| Total Sources | XXX | |
| II. Application of Funds | ||
| Fixed Assets (less depreciation) | XXX | |
| Investments | XXX |
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2022Set ANNUAL1 markMCQQ.Under Single Entry accounting it is possible to prepare – A. a trial balance B. a profit and loss account C. a receipt and payment account D. a balance sheet
›Reveal solutionSolution
Under Single Entry accounting, since complete double-entry records are not maintained, the only one of the four listed statements that can still be prepared (using special techniques such as the Net Worth/Statement of Affairs method or the Conversion method) is a Profit and Loss Account — so the correct option is B.
Why the other options are wrong:
Option Can it be prepared under Single Entry? Why / why not A. a trial balance No A Trial Balance requires every account's debit and credit balances from a complete double-entry ledger; Single Entry does not maintain all accounts (often only cash and personal accounts), so a trial balance cannot be directly extracted. B. a profit and loss account Yes Using the Statement of Affairs (Net Worth) method — comparing opening and closing capital, adjusted for drawings and additional capital — or the Conversion method, a Statement of Profit or Loss can be prepared even without full double-entry books. C. a receipt and payment account No A Receipts and Payments Account is a feature of Not-for-Profit Organisations maintaining their own cash book of receipts/payments; it is not something "prepared" from incomplete records in this sense. - COHSEM Manipur Higher Secondary 1st Year (Commerce) 2022Set ANNUAL1 markQ.What is the common objective of Single Entry System and Double Entry System?
›Reveal solutionSolution
The common objective of both the Single Entry System and the Double Entry System is to help the business owner ascertain the profit or loss earned, and the financial position (assets and liabilities), of the business for a given accounting period.
Explanation: Although the two systems differ sharply in their method and reliability —
- Double Entry System records both the debit and credit aspect of every transaction in a scientific, complete manner, giving accurate and verifiable results.
- Single Entry System is an incomplete, unscientific mix of double entry (for some accounts like cash and personal accounts) and single entry/no entry (for others), making it inherently less reliable. …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2022Set ANNUAL1 markQ.Can a limited company maintain its account under Single Entry System ?
›Reveal solutionSolution
No, a limited company cannot maintain its accounts under the Single Entry System.
Explanation: Under the Companies Act, every company is legally required to maintain proper books of account on the Double Entry System of Book-keeping, which must give a true and fair view of the state of affairs of the company and explain its transactions. Reasons a limited company must use Double Entry (and not Single Entry):
- Legal requirement: Company law mandates proper, complete double-entry books of account.
- Statutory audit: A company's accounts must be audited, and Single Entry's incomplete records would make a proper audit impossible. …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2021Set ANNUAL1 markMCQQ.Under Single Entry accounting it is possible to prepare —(a) a trial balance(b) a profit and loss account(c) a receipts and payment account(d) a balance sheet
›Reveal solutionSolution
Under the Single Entry System, since complete double-entry records of all accounts are not maintained, only a Receipts and Payments Account (a simple summary of actual cash and bank transactions) can be reliably prepared directly from the available cash book; a Trial Balance, a formal Profit and Loss Account, or a Balance Sheet in the true double-entry sense cannot be prepared directly, because the full ledger (especially for real and nominal accounts other than cash) is missing.
Under Single Entry, typically only a Cash Book (sometimes supplemented by a few personal accounts of debtors/creditors) is maintained. A Receipts and Payments Account is essentially a classified summary of the cash book, so it CAN be directly drawn up from the records that do exist. By contrast:
- A Trial Balance (option a) requires balances from a complete set of double-entry ledger accounts, which Single Entry does not maintain.
- A Profit and Loss Account (option b) in the formal sense requires matching all nominal account balances (expenses/incomes) with accruals — not directly available.
- A Balance Sheet (option d) similarly needs a full set of real/personal account balances. …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2021Set ANNUAL1 markMCQQ.Secondary storage device is —(a) RAM(b) ROM(c) PENDRIVE(d) DISK DRIVE
›Reveal solutionSolution
Secondary storage devices store data permanently (even when power is off) and are external to the processor, unlike RAM/ROM which are primary memory. Of the options given, the standard textbook classification treats DISK DRIVE (hard disk) as the primary example of a secondary storage device.
Computer memory is broadly classified as:
- Primary memory — RAM (Random Access Memory, volatile, used for temporary working storage) and ROM (Read Only Memory, non-volatile, holds firmware) — both are directly accessible to the processor and are NOT classified as 'secondary storage'.
- Secondary (auxiliary) storage — non-volatile storage external to the main processing unit, used for permanent data storage: examples include the Hard Disk Drive, Floppy Disk, CD/DVD, and Pen Drive (USB flash drive). …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2021Set ANNUAL1 markQ.What is the common objective of Single Entry System ?
›Reveal solutionSolution
The Single Entry System is adopted mainly by small traders and sole proprietors whose main objective is to find out, with the least possible effort and cost, how much profit or loss their business has made over a period — not to maintain a complete, formal double-entry set of books.
Under Single Entry, usually only a cash book and a few personal accounts (debtors/creditors) are maintained, without full real and nominal accounts. The owner's core concern is typically simple: 'did my business make money this year, and roughly how much?' — rather than needing the full analytical detail, cross-checking ability, and formal reporting that a complete double-entry system (with a Trial Balance, Trading/P&L Account and Balance Sheet) provides. This system suits very small businesses where maintaining elaborate books would be disproportionately costly …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2021Set ANNUAL1 markQ.Can a limited company maintain its account under Single Entry System ?
›Reveal solutionSolution
A limited company cannot legally maintain its accounts under the Single Entry System; company law requires proper books of account to be kept on the double entry system.
Unlike a sole proprietorship or partnership firm (which are free to adopt Single Entry if they wish, since it is only an informal/incomplete style of record-keeping rather than a recognized formal system), a company is a separate legal entity governed by statute. Company law (e.g. the Companies Act) requires every company to maintain 'proper books of account' that give a true and fair view of its state of affairs and explain its transactions, and these must be kept on the accrual basis and according to the double entry system of accounting. This is also necessary because a company must periodically prepare audited financial statements (Balance Sheet, Profit and Loss Account) for its shareholders, regulators and the public, and file statutory returns — none of which can be reliably and verifiably p …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2021Set ANNUAL1 markQ.Give one limitation of Computerized Accounting System.
›Reveal solutionSolution
One significant limitation of a Computerized Accounting System is its heavy dependence on continuous power supply and properly functioning hardware/software, making it vulnerable to disruption and data loss.
Unlike manual accounting, which can continue (even if slowly) using pen and paper, a computerized accounting system cannot function at all without electricity and a working computer system. A power cut, hardware malfunction, software bug, or an attack by a computer virus/hacker can bring accounting work to a complete halt, and in the worst case, can corrupt or permanently destroy valuable financial data if proper backups are not maintained. This creates an ongoing cost and responsibility for the business to invest in reliable power backup, regular data backups, antivirus/security software, and trained technical staff — resources a very small business may struggle to afford.
…
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2020Set ANNUAL1 markMCQQ.———————— Account is a summary of Cash Book.(a) Income and Expenditure(b) Ledger(c) Balance Sheet(d) Receipts and Payments(a) Income and Expenditure(b) Ledger(c) Balance Sheet(d) Receipts and Payments
›Reveal solutionSolution
A Receipts and Payments Account is a summary of the Cash Book. The correct option is (D) Receipts and Payments.
A Receipts and Payments Account is prepared by Not-for-Profit Organisations (clubs, societies, charitable institutions) at the end of the accounting year. It is essentially a classified summary of the Cash Book — it takes every cash and bank receipt and payment recorded in the Cash Book during the year and groups them together under appropriate headings (e.g. all subscriptions received together, all salaries paid together), retaining the same opening and closing cash/bank balances as the Cash Book.
…
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2020Set ANNUAL1 markMCQQ.Statement of Affairs is prepared to calculate ——————.(a) Total Assets(b) Capital(c) Cash Balance(d) Total Liabilities(a) Total Assets(b) Capital(c) Cash Balance(d) Total Liabilities
›Reveal solutionSolution
A Statement of Affairs is prepared to find out Capital. The correct option is (B) Capital.
Where a business keeps incomplete (single entry) records, a Statement of Affairs is prepared in the same format as a Balance Sheet — listing all the assets on one side and all the liabilities on the other — in order to find the amount of Capital as the balancing figure (Capital = Total Assets − Total Liabilities), since Capital cannot be directly read off from an incomplete set …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2020Set ANNUAL1 markQ.How is entrance fees treated in final account of non-trading organisations?
›Reveal solutionSolution
Entrance fees are, in the absence of any specific instruction, treated as revenue income and credited to the Income and Expenditure Account; if the question states they are to be capitalised, they are credited directly to the Capital Fund in the Balance Sheet instead.
Entrance fees (or admission fees) is a one-time amount paid by a person when they are admitted as a member of a Not-for-Profit Organisation.
Its treatment in the final accounts depends on the information given:
- General rule (no specific instruction given): Entrance fees is treated as a revenue receipt, recurring in nature (since new members keep joining every year), and is credited in full to the Income and Expenditure Account for the year in which it is received. …
- COHSEM Manipur Higher Secondary 1st Year (Commerce) 2020Set ANNUAL1 markQ.Give one reason for keeping incomplete records.
›Reveal solutionSolution
One reason for keeping incomplete records: it is a simple, inexpensive, and less time-consuming method of record-keeping, suitable for small businesses.
Many small shopkeepers, professionals and small partnership firms keep incomplete (single entry) records rather than a full double-entry system mainly because:
- Maintaining a complete, scientific double-entry system (Journal, Ledger for every account, Trial Balance, etc.) requires accounting knowledge/trained staff, and more time and cost, which a small business may not be able to afford or may feel is unnecessary for its scale of operations. …
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