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Advance Financial Accounting (FIN-611)

LESSON # 21

COMPANY ACCOUNTS

Components of financial statements

As per International Accounting Standards there are five components of financial

statements:

Balance Sheet

Income Statement

Statement of Changes in Equity

Cash Flow Statement

Notes

Here we will discuss all but cash flow statement in detail as the cash flow statement

will be discussed in separate chapter.

1) Balance Sheet

It has already been discussed in the preceding section that balance sheet of an entity

shows financial position, which comprises of resources and source. A very simple

equation of balance sheet is:

Assets = Owners' Equity + Liabilities.

Where Assets are the resources and Owners' Equity and Liabilities are the sources.

Limited Liability Company

Balance Sheet

As on December 31, 2009

Rs.

Assets (Resources)

Non Current Assets

Fixed Assets

Tangible Assets

***

Intangible Assets

***

Long Term Investments

***

Long Term Loans

***

Long Term Advances, Deposits & Prepayments

***

Current Assets

***

Current Liabilities

(***)

***

Capital Employed

***

Advance Financial Accounting (FIN-611)

Financed By (Sources)

Owners' Equity

Ordinary Share Capital

***

Reserves

Capital Reserves

***

Revenue Reserves

***

Non Current Liabilities

Loan Stocks/Term Finance Certificates

***

Loan from financial institutions

***

Finance lease liability

***

Capital Employed

***

Approved by Chief Executive and a Director

Classification of assets in the balance sheet is on the base of permanency order. This is

known as marshaling. In a company balance sheet grouping and marshaling is strictly

followed. It is clearly presented in the balances sheet that assets are broadly classified

into Non-Current Assets and Current Assets. Non-Current Assets are then grouped

into fixed and other non-current assets. Fixed assets are further classified into fixed

tangible and fixed intangible assets.

a) Fixed Tangible Assets

These are the property, plant and equipment that are held by the entity a) for

production or selling of goods or services, b) for administrative purposes, or c) for

rental to others. These are expected to be useful for the entity for more than one

accounting year.

Examples include: land & Building, Plant & Machinery, Furniture & fixtures, Motor

Vehicles, Office equipments etc.

b) Fixed Intangible Assets

These are the identifiable, non monetary asset in control of the entity that have no

physical existence and are expected to be useful for the entity for more than one

accounting year.

Examples include: Trademark, Copy right, Patents, Designs etc.

c) Long term Investment

These are the investments made by the company in other entities for more than one

accounting year.

Advance Financial Accounting (FIN-611)

Examples include: Investments in equity instruments or debt instruments of other

entities.

d) Long term loans

These are the loans given to the third parties on long term basis, receivable after the

expiry of more than one accounting year.

e) Long term advances, deposits, and prepayments

These are the security deposits, fixed deposits, advances given to the suppliers of

assets, and prepayments on long term basis.

f) Current Assets

These are the assets recoverable and tradable within the normal operating cycle of an

entity that is 12 months after the balance sheet date in normal circumstances. Cash and

cash equivalents are also current assets.

g) Current Liabilities

These are the obligations that are payable within the normal operating cycle of an

entity that is 12 months after the balance sheet date in normal circumstances. This also

include bank overdraft.

2) Income Statement

Income Statement is prepared to know the financial performance of an entity. In an

Income Statement; expenses for the year are subtracted from the incomes earned

during the year. Both incomes and expenses are measured according to the accrual

concept, whereas, profit are measured according to the matching concept.

According to the IAS 1 Income Statement can be prepared using ether:

1. Function of expenses method, or

2. Nature of expenses method

a) Function of expenses method

According to the functions of expenses method the expenses are divided into five

groups according to their functions:

· Cost of sales

· Administrative

· Selling and marketing

· Financial

· Income Tax

Advance Financial Accounting (FIN-611)

Incomes are also divided into two groups:

Sales revenue (operating income)

Other incomes (non-operating incomes)

Limited Liability Company

Income Statement

For the Year ended December 31, 2006

(Function of expenses method)

Rs.

Sales revenue

***

Cost of goods sold

(***)

Gross profit

***

Operating expenses

Administrative expense

***

Selling & Marketing expenses

***

(***)

Profit from operations

***

Other income

***

Financial expenses

(***)

Profit before tax

***

Income tax expense

(***)

Profit after tax

***

b) Nature of expense method

According to the nature of expense method all expenses are aggregated in the incomes

statement and are matched with the total incomes for the year. Since both incomes and

expenses are of different nature therefore this method of preparing Income Statement

is known as nature of expense method.

Limited Liability Company

Income Statement

For the Year ended December 31, 2006

(Nature of expense method)

Rs.

Incomes

Sales revenue

***

Other incomes

***

Expenses

Increase/decrease in inventory

***

Raw materials and consumables

***

Employees' salaries and wages

***

Utility bills

***

Other business operation expenses

***

(***)

Financial expenses

(***)

100

Advance Financial Accounting (FIN-611)

Profit before tax

***

Income tax expense

(***)

Profit after tax

***

3) Statement of Changes in Equity

Statement of changes in equity is prepared to know the movement in the items of

owners' equity. There might be two types of the statement:

1. Statement that shows the movement in the retained profits only

2. Statement that shows the movement in all the items of owners' equity

Limited Liability Company

Statement of changes in equity

For the year ended December 31, 2006

(Showing movement in the retained profits only)

Rs.

Retained profits b/f

***

Profit after tax

***

Dividend paid

***

Transfer to reserves

***

(***)

Retained profits c/f

***

(Showing movement in all items of owners' equity)

Share Revaluation Named Retained Total

Capital Premium Reserve Reserve Profits

Opening Balance ***

***

Fresh issue of shares

***

Revaluation of Assets

***

Profit after tax

***

Dividend paid

(***)

Transfer to named reserves

***

(***)

Bonus Share

***

(***)

Totals

***

*** .

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