MEANING OF FINANCIAL STATEMENTS As per cycle,the transactions are first recorded in journal,from where they are posted to the relevent accounts in the ,at the end of ,these accounts are balanced and a is prepared for finding out the arithmatical accuracy of books of accounts. After preparing the trial balance,final accounts are prepared to achieve the objectives of accountancy A businessman is interested to know the final results of the business,whether he has earned or suffered loss in that particular accounting period.two main objectives of maintaining accounts are 1. ..to find out the profit or loss made by the business at the end of regular periodic intervals 2. 2..to know the strength or weakness of the financial health of the business It is relevent to corelate the financial heal;th of the business with the physical health of a person,whether a particular person is physically sound or not,he undergoes through various medical tests like lipid profile test, blood pressure check up,whether a person,s blood pressure is normal or not,his blood suger level is under contro,similarly in case of financial health of a business,the various components of financial statements are compared to know the profitability,liquidity,solvency and turn over potential of the businessso in order to know the profitability,debt and position,its liquidity and solvency positions the business man prepares the financial statements at the end of each accounting period However in order to know the profit and loss earned by the the firm, and trading and profit and loss is prepared. or position statement will portray the financial condition of a firm on a particular date.these two statements that is trading and profit and loss account and balance sheet is prepared to give the final results of the business,that is why these statements are jointly called final accounts Thus,final accounts include the preparation of 1. .trading and profit and loss account 2. Balance sheet So far as trading and profit and loss account is concerned,it is summery of those accounts which affect the profit and loss of the business concern.there are various accounts of and in the trial balance,all these accounts either increase the profits or increases the losses or vice versa.you will find all expenses and losses which affect the profits of the business negatively on the debit side of trial balance,for example purchases,rent,stationary,electricity etc and all incomes and gains like sales,discount received,returns on investment etc on the credit side of triail balance.in order to know the overall situation of the effect of these accounts,these are grouped at one place.thus a trading account is prepared every year to know the gross profit Here the of goods sold and all direct expenses are matched with the net sales,this is done by formally preparing an account called ‘’trading account’’ All items to be written on its debit side and on the credit side are being discussed in detail below ITEMS TO BE WRITTEN ON THE DEBIT SIDE 1. .OPENING STOCK…this item is theclosing stock of the last year and it will always be there in the trial balance of last year along with other .theopening stock may include the following types of stock a stock of raw material b stock of workn in progress or semi finished goods c stock of finished goods The opening stock is usually written as the first item on the debit side of this account However in the first year of the business,there will be no opening stock 2 PURCHASE AND PURCHASE RETURNS GOODS PURCHASED TO SELL AND TERMED AS PURCHASES,OR THE RAW MATERIAL FOR THE MANUFACTURING BUSINESS HOWEVER THE GOODS RETURNED TO SUPPLIERS DUE TO ANY REASON ARE TERMED AS ‘ PURCHASE RETURNS’ OR ‘RETURN OUTWARDS’. PURCHASE IS AN OR NOMINAL ACCOUNT,SO PURCHASE ACCOUNT HAS ALWAYS A DEBIT BALANCE AND APPEARS ON THE DEBIT SIDE OF TRIAL BALANCE PURCHASE RETURNS ARE SHOWN AS DEDUCTIONS OUT OF PURCHASES

To purchases……………………………….RS 315000 Less..purchase returns…………………RS 15000 NET PURCHASES…………………………..RS 300,000 Both purchases and credit purchases will be written here

2. ..DIRECT EXPENSES These are the expenses which are directly identifiable with purchases,for example expenses incurred on bringing the goods to godown and all manufacturing expenses in case of manufacturing business,generally direct expenses include the following expenses WAGES… the wages paid to workers working in the factory are recorded on the debit side of trading account,however if any wages are paid for fixing or installing any then these wages are added to the cost of asset at that time it is a and not a revenue expenditure,also if this is compound item like’’wages and salaries’ this will be written in the trading account as it is assumed that the wages are a major part of this item. B CARRIAGE INWORDS OR FREIGHT INWORDS These expenses are paid to bring the goods from the suppliers ,therefore they are recorded in the trading account, if nothing is given to know whether it is a carriage inword’ or ‘’carriage outward’’ then it will be assumed as carriage inward only.however if any carriage or freight is paid on bringing a fixed asset like a machine then the amount will be added to the cost of the fixed asset,then it is a capital expenditure and will not be debited to the trading account

C. .POWER AND FUEL,Fuel power water used to run the machines will be included under this heading All such expenses will be debited to trading account D FACTORY LIGHTENING..Electricity consumed for providing light in the factory or to run the fans are also debited to trading account E FACTORY RENT AND RATES The rent paid for the factory and any muncipal taxs,which are also called rates,should be debited to trading account Import duty or customs duty paid on the purchase of goods is debited to trading account. G EXCISE DUTY…It is paid to the govt on the goods manufactured,it is therefore,debited to trading account. H OCTROI DUTY…It is paid to the muncipal authorities when the goods enter the city,it is also debited to trading account I...PACKAGING EXPENSES..It is a direct expense,the cost of putting all the match sticks in a match box is a packging expense.this is because the match sticks are not individually sold.

ITEMS TO BE WRITTEN ON THE CREDIT SIDE

1. ….SALES AND SALES RETURNS..Sales account is a revenue account,credit all incomes and gains,sales generate the revenue hence the sales account always shows a credit balance and it includes both the cash and credit sales made during the year.the sales return account iwill be deducted from the sales to show the net sales on the credit side of trading account 2. ..CLOSING STOCK AND ITS The unsold goods at the end of the year is called ‘closing stock’’ it is valued at ‘cost’or market’price,whichever is less Just like opening stock it may include a stock of raw material b..stock of semi finished goods and C stock of finished goods