Financial Statements of a Company

Financial statements are reports that show how a company performed and what it owns and owes.

A company does many transactions during the year.

At the end of the year, it prepares reports to answer two big questions.

Question 1: Did the company earn profit or suffer loss?

Question 2: What does the company own and what does it owe?

Example: Riya Stationery Ltd. wants to know how much profit it earned, how much cash and stock it has, how much it owes to suppliers, and how much capital belongs to shareholders.

Simple line: Financial statements are the company's yearly report card.

Owners and shareholders want to know profit.

Investors want to know whether the company is strong.

Banks want to know if the company can repay loans.

Management wants to make better decisions.

Government and tax authorities need financial information.

Suppliers and lenders want to know if the company is reliable.

Simple line: Financial statements help people understand the health of a company.

Riya Stationery Ltd. sells notebooks, pens, and school bags.

During the year, it sold goods worth Rs.5,00,000.

It paid salaries Rs.80,000 and rent Rs.60,000.

It bought furniture Rs.50,000.

It has stock left Rs.70,000 and bank balance Rs.40,000.

It owes suppliers Rs.30,000.

It has share capital Rs.2,00,000.

At the end of the year, Riya wants to know whether the company earned profit and what the company owns and owes.

Simple line: Profit and Loss shows performance. Balance Sheet shows position.

A company mainly prepares Statement of Profit and Loss, Balance Sheet, and Notes to Accounts.

Statement of Profit and Loss shows income, expenses, and profit or loss.

Balance Sheet shows assets, liabilities, and shareholders' funds.

Notes to Accounts give details behind the numbers.

Example: Balance Sheet may show Current Assets Rs.1,50,000. Notes may show Inventory Rs.70,000, Trade Receivables Rs.40,000, and Cash and Bank Rs.40,000.

Simple line: Main statement gives summary. Notes give details.

Statement of Profit and Loss shows whether the company made profit or loss during the year.

It includes income such as revenue from sales and other income.

It includes expenses such as purchases or cost of goods sold, salaries, rent, depreciation, interest, and other expenses.

Very simple formula: Profit = Income - Expenses.

Example: Riya Stationery Ltd. has revenue Rs.5,00,000 and expenses Rs.4,00,000.

Profit = Rs.1,00,000.

Simple line: Statement of Profit and Loss tells how much the company earned after expenses.

Balance Sheet shows the financial position of a company on a particular date.

It shows shareholders' funds, liabilities, and assets.

Balance Sheet answers: What money belongs to shareholders? What money is owed to outsiders? What does the company own?

Simple equation: Assets = Shareholders' Funds + Liabilities.

Example: share capital Rs.2,00,000 and loan Rs.1,00,000 give total funds Rs.3,00,000.

Assets may be furniture Rs.50,000, stock Rs.70,000, debtors Rs.80,000, and bank Rs.1,00,000.

Total assets = Rs.3,00,000.

Simple line: Balance Sheet shows where money came from and where it is used.

Notes to Accounts give details of items shown in financial statements.

Example: Balance Sheet may show Current Assets Rs.1,90,000.

Notes may explain Inventory Rs.70,000, Trade Receivables Rs.80,000, and Cash and Bank Rs.40,000.

Simple line: Notes explain the numbers shown in the main statements.

Shareholders' funds are the money belonging to company owners or shareholders.

It mainly includes Share Capital and Reserves and Surplus.

Share Capital is money received by issuing shares.

Reserves and Surplus are accumulated profits or reserves kept in the company.

Example: Share Capital Rs.2,00,000 and Reserves Rs.50,000.

Shareholders' Funds = Rs.2,50,000.

Simple line: Shareholders' funds show owners' money in the company.

Assets are things owned or controlled by the company.

Examples of assets are land, building, furniture, machines, inventory, debtors, cash, and bank balance.

Liabilities are amounts the company owes to others.

Examples of liabilities are loans, debentures, creditors, and outstanding expenses.

Simple memory line: Assets = what company owns. Liabilities = what company owes.

Current means short-term, usually within one year.

Non-current means long-term, more than one year.

Current assets include inventory, trade receivables, cash, and bank.

Non-current assets include building, machinery, and furniture.

Current liabilities include trade payables, outstanding expenses, and short-term borrowings.

Non-current liabilities include long-term loans and debentures.

Simple line: Current = short-term. Non-current = long-term.

A company may earn profit but still have low cash.

Example: company sold goods of Rs.1,00,000 on credit.

It earned revenue, but cash is not received yet.

So profit may increase, but cash may not increase immediately.

Another example: company buys a machine for cash.

Cash decreases, but the full amount may not become expense immediately.

Simple line: Profit is not always equal to cash.

Statement of Profit and Loss starts with Revenue from Operations.

Add Other Income to find Total Income.

Less Expenses to find Profit or Loss.

Balance Sheet has Equity and Liabilities on one side: Shareholders' Funds, Non-current Liabilities, and Current Liabilities.

Balance Sheet has Assets on the other side: Non-current Assets and Current Assets.

This is a simplified learning format. Detailed company formats can have more lines and notes.