Concept And Meaning Of Financial Statement Analysis

Financial statement analysis is an analysis that highlights the important relationship in the financial statements. Financial statement analysis focuses on the evaluation of past performance of the business firm in terms of liquidity, profitability , operational efficiency and growth potentiality. Financial statements analysis includes the method use in assessing and interpreting the result of past performance and current financial position as they relate to particular factors of interest in investment decisions. Therefore financial statement analysis is an important means of assessing past performance and in forecasting and planning future performance.

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Balance Sheet As The Last Step Of Final Account

Balance sheet is the last step of final account. Balance sheet is prepared after the preparation of profit and loss appropriation account. Balance sheet is statement not an account. Therefore balance sheet is also known as "Position Statement". Balance sheet is defined as accounting statement of financial position of a company presented at specific point of time usually at the end of the accounting period.

Balance shows assets on one side and liabilities on other side. Balance sheet may be prepared in the horizontal or in the vertical form.

Balance sheet discloses the financial position of a company at a specific point of time and for a fixed period. Hence, even a single transaction will change assets and liabilities.

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Concept And Meaning Of Profit And Loss Appropriation Account

Profit and loss appropriation account shows the distribution of net profit amongst the shareholders in the form of dividend and transfer of profit to various reserves and issue of bonus share. profit and loss appropriation account is prepared after the preparation of profit and loss account. Profit and loss account provides the information about adjustment relating to last year. Profit and loss appropriation account also provides the information about the appropriation of dividend out of available profit. Profit and loss appropriation account is prepared after profit and loss account and before the preparation of balance sheet. Profit and loss appropriation account is a vital item of final account.

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Items Include In The Credit Side Of Profit and loss Account

Following items are included in the credit side of profit and loss account

1. Gross Profit

Gross profit is transferred from trading account and it is the beginning item of profit and loss account.

2. Non-trading Income

Interest received from bank,incomes received from outside investments like share and debenture are known as non-trading incomes.

3.Other incomes

Those incomes other than income from sale of goods are called other income. Discounts or commission received are the examples of other income.

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Items Included In The Dedit Side Of Profit And Loss Account

Followings are the items which are included in the debit side of profit and loss account.

1. Gross Loss

Gross loss is the debit balance of trading account which transferred to the profit and loss account.

2. Selling and distribution expenses

Expenses incurred for the promotion of sales and distribution of sold goods are selling and distribution expenses. Packing charge, carriage , freight outward, sales tax, forwarding charge , export duty , travelling expenses etc are the examples of selling and distribution expenses.

3.Administrative Expenses

Administrative expenses are those expenses which are incurred for day to day running of office management.

4. Financial Expenses

Financial Expenses are incurred for arranging fund to run the business. Cash discount allowed, interest on capital, interest on loan discount on bill etc. are the examples of financial expenses.

5. Maintenance Expenses

Expenses incurred for maintaining the fixed assets are called fixed expenses. Repair and renewable depreciation of assets are some examples of maintenance expenses.

6. Abnormal Losses

Abnormal losses are those losses which are incurred due to the carelessness of the management. Loss on sale of asset , stock lost by fire etc are the examples of abnormal losses.

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Advantages Of Profit And Loss Account

The main advantages of profit and loss account are as follows:

1.Profit and loss account gives the actual information about net profit or net loss of the business for an accounting period.

2. Profit and loss account gives the actual information about indirect expenses.

3. Profit and loss account serves to determine the ratio between net profit to sales.

4. Profit and loss account helps in determining the ratio between net profit to operating expenses.

5.Profit and loss account helps in controlling indirect expenses.

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Concept And Meaning Of Profit And Loss Account

Profit and loss account is prepared after the preparation of trading account.The main objective of preparing profit and loss account is to achieve the operating results of a company at the end of accounting period. Profit and loss account is a nominal account having debit side and credit side. All the indirect expenses are recorded in the debit side of the profit and loss account and all the incomes except sales and closing stocks are recorded in the credit side of the profit and loss account. In profit and loss account if debit side is excess the credit side , the difference is called net loss. If the credit side of profit and loss account is excess than the debit side ,the difference is called net profit. Net profit amount of profit and loss account is transferred to the credit of profit and loss appropriation account and net loss of profit and account is transferred to the debit side of profit and loss appropriation account. Profit and loss account helps to ascertain net profit or net loss from business operation.

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