Financial statements (or financial report) is a formal record of the financial activities and position of a business, person, or other entity.
What is "Trial Balance" ?
- "Trial Balance" is a list of closing balances of ledger accounts on a particular date and is the first step towards the preparation of financial statements.
- It is usually prepared at the end of an accounting period to assist in the drafting of financial statements.
- Ledger balances are divide into debit balances and credit balances.
- Asset and expense accounts appear on the debit side of the "Trial Balance" whereas liabilities, capital and income accounts appear on the credit side.
- If all accounting entries are recorded correctly and all the ledger balances are accurately extracted, the total of all debit balances in the "Trial Balance" must equal to the sum of all credit balances.
Purpose of trial balance :
- The purpose of a trial balance is to prove that the value of all the debit value balances equal the total of all the credit value balances.
- If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts.
What is "Trading Account" ?
- "Trading Account" is the first stage in the process of preparing final accounts. "Trading Account" shows the "Gross Profit" or "Gross Loss" during a financial year.
- "Trading Account" consists of two sides 'debit and credit'. Direct expenses are recorded on its debit side and direct incomes on its credit side.
- All items of direct expenses and direct income of current year are considered into it.
- If its credit side exceeds it represents "Gross Profit" and if debit side exceeds it shows "Gross Loss".
- It is very important to find out "Gross Profit" or loss for the business to know whether purchasing, manufacturing and sales are sufficient for earning or not.
- Trading Account contains all direct expenses on left side and all direct incomes on right side apart from opening stock on left side and closing stock on right side.
Purpose of "Trading Account" :
- "Trading Account" helps to know "Gross Profit" or loss.
- "Trading Account" provides information about the direct expenses.
- "Trading Account" provides safety against possibilities of loss.
This "Gross Profit" or "Gross Loss" is carry forwarded to "Profit & Loss Account" in opposite side.
"Profit & Loss Account" ( P & L )
What is "P & L Account" ?
- An income statement or statement of profit or loss. Income statement, statement of financial performance, earnings statement, operating statement.
- The particulars required for the preparation of profit and loss account are available from the "Trial Balance". Only indirect expenses and indirect income are considered in it.
- This account starts from the result of "Trading Account" ("Gross Profit" or "Gross Loss"). "Gross Profit" is shown on the credit side of the profit and loss account and "Gross Loss" is shown on the debit side of this account.
- All indirect expenses comes on the debit side of this account and all indirect income on credit side.
- If the total of the credit side exceeds the debit side, the result is "Net Profit" and if the total of the debit side exceeds the total of the credit side, the result is "Net Loss".
- So, the "Net Profit" or "Net Loss" of a certain accounting period is determined through profit and loss account.
- "P & L Account" contains all indirect expenses on left side and all indirect incomes on right side .
Purpose of "P & L Account"
- The purpose of the "Profit & Loss Account" is to show whether a business has made overall profit or loss (Net Profit or Net Loss) over a financial year.
- It describe how the profit or loss has come.
- It shows a company's financial progress during the specific period of time.
What is "Balance-Sheet" ?
- "Balance-Sheet" is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in time. "Balance-Sheet" includes assets on one side, and liabilities on the other.
- For the "Balance-Sheet" to reflect the true picture, both heads (liabilities & assets) should tally (Assets = Liabilities + Equity).
- In other words, the "Balance-Sheet" illustrates your business's net worth.
- The Net Profit or Loss from "P & L Accounts" is carried forward in Balance-Sheet.
Purpose of "Balance-Sheet"
- The purpose of the "Balance-Sheet" is to provide an idea of a company’s financial status.
- The statement shows what an entity owns (assets) and how much it owes (liabilities), as well as the amount invested in the business.