Accountancy for Class 12, Part 1, Chapter 3 Financial Statements of a Company

Learn CBSE Accountancy Index Terms for Class 12, Part I, Chapter 3 Financial Statements of a Company

1. Financial Statements of a Company – Financial statements present an actual view of the financial performance of an organisation at the end of a financial year. It represents a formal record of financial transactions taking place in an organisation. These statements help the users of the information in determining the financial position, liquidity, and performance of the organisation.

Financial statements reflect the impact of the financial effects of the transactions on the organisation. The preparation of financial statements is done by both profit and non-profit organisations. It forms a crucial part of the annual report of any organisation.

Financial statements are used by different stakeholders of an organisation which include shareholders, staff, customers, investors, suppliers, stock exchanges, government authority, and other related stakeholders.

2. Balance Sheet – A balance sheet is known as a statement of financial position as it shows the position of assets, liabilities, and equity at the end of an accounting period. The net worth of a business can be determined by deducting the liabilities from the assets.

Suppose the users of financial information are looking for information regarding the financial position of the company. In that case, a balance sheet is the most appropriate statement which will present the necessary information.

In other words, the balance sheet is a statement that shows the financial position of the business. It records the assets and liabilities of the business at the end of the accounting period after the preparation of trading and profit and loss accounts.

3. Statement of Profit and Loss Account – The profit and loss account shows the net profit and net loss of the business for the accounting period. This account is prepared in order to determine the net profit or net loss that occurs during an accounting period for a business concern.

Profit and loss accounts get initiated by entering the gross loss on the debit side or gross profit on the credit side. This value is obtained from the balance, which is carried down from the trading account.

A business will incur many other expenses in addition to direct expenses. These expenses are deducted from the profit or are added to a gross loss, and the resulting value thus obtained will be net profit or a net loss.

4. Reserves – A reserve is retained earnings secured by a company to strengthen its financial position, clear debt, and credits, buy fixed assets, company expansion, legal requirements, investment, and other plans. Reserves are usually done to save cash from being used for other purposes. Reserve funds do not have any legal restrictions, so the company can use them for any purpose.

5. Current Assets – A current asset is an asset that a company holds, and can be easily sold or consumed and further lead to the conversion of liquid cash. For a company, a current asset is an important factor, as it gives them a space to use the money on a day-to-day basis and clear the current business expenses. In other words, the meaning of current assets can be explained as an asset that is expected to last only for a year or less.

In other words, An asset is referred to as a current asset when it is expected to be realised or planned to be sold or utilised within 1 year or the enterprise’s standard operating period. Enterprises hold the current assets in the form of cash or their regeneration into cash or for utilising it by furnishing goods and services.

6. Non-current Assets – A non-current asset is an asset that the company acquires or invests in, but the value of that investment does not recur within an accounting year. These types of investments last for a long time and cannot be easily liquidated into cash, and can generate economic benefits to the company for more than a year.

In other words, the company capitalises on the cost of the assets or investment for a long time or many years, rather than evaluating it within the year of purchase of the asset.

7. Borrowings – Borrowed funds are referred to as the funds that a business needs to borrow from outside the company in order to provide a source of capital for the business. These funds are different from the capital owned by the company, which is called equity funds.

8. Trade Payables – Trade payables, sometimes referred to as ‘Payables,’ are an organisation’s continuous costs or ongoing expenses that are commonly transient or short-term obligations, which should be paid off in a predetermined period to stay away from default. Default is the inability to reimburse an obligation or repayment of a debt.

9. Proposed Dividend – The proposed dividend is the dividend declared or proposed to be distributed among the shareholders of the company during a financial year, which will be paid in the next financial year. A dividend proposed in the previous year and paid during the current year results in financing cash outflow.

10. Provisions – Provisions in accounting refer to the amount that is generally put aside from the profit in order to meet a probable future expense or a reduction in the asset value, although the exact amount is unknown. Provision cannot be seen as savings, but it can be regarded as a way of recognising any upcoming or future liabilities.

Most of the time, provision is treated as a reserve, but reserve and provision are not interchangeable. A provision is set up to cover probable future liabilities, while a reserve is a part of the profit that is set aside for assisting the company’s growth and expansion.

11. Fixed Assets – Fixed assets are long-term tangible assets that are used by businesses to generate income. Fixed assets provide the firm with long-term financial gain as they have a useful life of more than one year. Fixed assets are also known as capital assets and are denoted by the terms property, plant, and equipment in the balance sheet. Fixed assets cannot be easily converted into cash.

12. Investments – Investments are non-current assets that are recorded under the head of fixed assets. Investments lack physical being but are used over a long period of time.

13. Trade Receivables – Trade receivable is the payment or proceeds that the organisation will get from clients who have bought its services and products using a loan or credit. Generally, the credit period is short, which ranges from a few days to months, or at times, perhaps a year.

We hope that the offered Accountancy Index Terms for Class 11 with respect to Part 2, Chapter 3: Financial Statements of a Company will help you.

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