Financial statements play a huge rule in accounting. Various stakeholders use them for their several purposes. They are most commonly used for understanding the financial performances of a business. Different types of financial statements play different roles.
Types of Financial Statements
There are generally just two types of financial statements:
- Balance sheet
- Statement of profit and loss
Apart from these two, accountants also create some other reports to understand the movement of funds. For example, cash flow statements show how liquid a business is.
Let us see in detail the types of financial statements. A balance sheet is basically an accurate representation of assets and liabilities of a business. They contain all details pertaining to the long-term and short-term assets, debts, and capital of a firm. It is one of the most important tools stakeholders use to understand a particular business.
Every company has to annually prepare and present a balance sheet according to the (Revised) Schedule VI of Companies Act, 1956. Companies generally cannot deviate from this format. Apart from this, they even have to follow the relevant Accounting Standards of ICAI.
Contents of a Balance Sheet
According to Schedule VI, a balance sheet must comprise the following contents and requirements. Every balance sheet basically contains these parts: share capital, reserve and surplus, current & non-current assets and liabilities, borrowings, etc.
Balance sheets must state disclosures relating to share capital in notes to accounts. Further, they must contain the following modifications and additions:
- All rights, preference and restrictions associated with each class of share have to be specified.
- Specific disclosures pertaining to the identity of certain shareholders.
- Details regarding the number of shares issued, subscribed, paid, reserved and bought back.
2. Reserve and surplus
The balance sheet must classify reserves and surplus funds in the following manner:
- Capital reserve
- Capital redemption reserve
- Debenture redemption reserve
- Securities premium reserve
- Surplus funds
3. Current & non-current assets
Every balance sheet has to classify assets in categories of current and non-current. A current item has typical features like these: it is used for less than 12 months, it is mainly held for trading, etc. This distinction is important because it helps make the details of assets more comprehensive.
Similar to assets, borrowings and liabilities can also be current or non-current. Loans are debts that have a repayment period of more than 12 months are non-current borrowings. For example, large bank loans are generally non-current in nature. On the contrary, those with shorter repayment periods are current liabilities.
Even investments come under categories of current and non-current. Investments which can be realised within 12 months are current investments, while others are non-current. Every balance sheet must reflect the business’s investments in this format.
Apart from these basic contents, a typical balance sheet also contains some other information. This includes trade receivables, trade payables, cash and cash equivalent, inventories, etc.
Statement of Profit and Loss
Apart from the balance sheet, a statement of profit and loss is the second important financial statement. It basically shows revenues and expenses of a business. Deduction of taxes from this depicts the final profit or loss amount. The format of a profit and loss statement is also given in Schedule VI (Part II) of Companies Act, 1956.
Contents of a Statement of Profit and Loss
- Revenue from operations, including sales and other operating revenue. Furthermore, finance companies have to state revenue from interest, dividend and other services.
- Other income, including income from interest, dividend, non-operating income and income from the sale of investments.
- Expenses, including costs of materials, stock-in-trade, finance costs, depreciation, employees benefits and all other expenses.
Treatment of these three items will finally result in a statement of profit and loss. Accountants also have to deduct taxes and extraordinary items from the profit to ascertain the final profit or loss amount.
Solved Question for You
Q: Deduction of ____ from the net profit shows the final profit or loss in the P&L statement.
- Current assets
- None of the above
Ans: The correct answer is A. We deduct the taxes payable to reflect the final amount of profit or loss of the company.