PPT - Financial Statement - II | Accountancy Class 11 - Commerce PDF Download

 Page 1


Financial 
Statements II
Page 2


Financial 
Statements II
Overview
Beyond Simple Accounts
Chapter 8 covered simple 
final accounts preparation. 
Now we'll address the 
accounting complexities 
normal to business 
operations that require 
adjustments when preparing 
financial statements.
Accrual Basis
The accrual basis of 
accounting emphasizes that 
revenues should be 
considered on earned basis 
(not receipt basis) and 
expenses on incurred basis 
(not paid basis).
Adjustment Process
We'll discuss all items requiring adjustments, how they're 
brought into the books of account, and how they're incorporated 
in the final accounts.
Page 3


Financial 
Statements II
Overview
Beyond Simple Accounts
Chapter 8 covered simple 
final accounts preparation. 
Now we'll address the 
accounting complexities 
normal to business 
operations that require 
adjustments when preparing 
financial statements.
Accrual Basis
The accrual basis of 
accounting emphasizes that 
revenues should be 
considered on earned basis 
(not receipt basis) and 
expenses on incurred basis 
(not paid basis).
Adjustment Process
We'll discuss all items requiring adjustments, how they're 
brought into the books of account, and how they're incorporated 
in the final accounts.
Need for Adjustments
Accrual Concept
According to the accrual 
concept, profit or loss for an 
accounting year is not based 
solely on cash receipts and 
payments during that year. 
This fundamental principle 
necessitates various 
adjustments.
Timing Differences
Some receipts and expenses 
in the current year may 
partially relate to the 
previous year or to the next 
year, requiring proper 
allocation to the correct 
periods.
True and Fair View
Without proper adjustments, 
the final accounts will not 
reflect the true and fair view 
of the business's financial 
position and performance, 
potentially misleading 
stakeholders.
Page 4


Financial 
Statements II
Overview
Beyond Simple Accounts
Chapter 8 covered simple 
final accounts preparation. 
Now we'll address the 
accounting complexities 
normal to business 
operations that require 
adjustments when preparing 
financial statements.
Accrual Basis
The accrual basis of 
accounting emphasizes that 
revenues should be 
considered on earned basis 
(not receipt basis) and 
expenses on incurred basis 
(not paid basis).
Adjustment Process
We'll discuss all items requiring adjustments, how they're 
brought into the books of account, and how they're incorporated 
in the final accounts.
Need for Adjustments
Accrual Concept
According to the accrual 
concept, profit or loss for an 
accounting year is not based 
solely on cash receipts and 
payments during that year. 
This fundamental principle 
necessitates various 
adjustments.
Timing Differences
Some receipts and expenses 
in the current year may 
partially relate to the 
previous year or to the next 
year, requiring proper 
allocation to the correct 
periods.
True and Fair View
Without proper adjustments, 
the final accounts will not 
reflect the true and fair view 
of the business's financial 
position and performance, 
potentially misleading 
stakeholders.
Need For Adjustments
Insurance Example
An insurance premium of 
1,200 paid on July 01, 2016 
covers 12 months. With the 
accounting year ending March 
31, 2017, only 900 should be 
expensed in 2016-17, with 300 
carried forward to 2017-18.
Salaries Example
Salaries for March 2017 paid 
on April 07, 2017 must be 
recorded as outstanding in 
2016-17 accounts, ensuring 
they're properly matched to 
the period they relate to.
Other Adjustments
Items not recorded daily 
(depreciation, interest on 
capital) must be adjusted 
when preparing financial 
statements to ensure true 
profit/loss and financial 
position.
Page 5


Financial 
Statements II
Overview
Beyond Simple Accounts
Chapter 8 covered simple 
final accounts preparation. 
Now we'll address the 
accounting complexities 
normal to business 
operations that require 
adjustments when preparing 
financial statements.
Accrual Basis
The accrual basis of 
accounting emphasizes that 
revenues should be 
considered on earned basis 
(not receipt basis) and 
expenses on incurred basis 
(not paid basis).
Adjustment Process
We'll discuss all items requiring adjustments, how they're 
brought into the books of account, and how they're incorporated 
in the final accounts.
Need for Adjustments
Accrual Concept
According to the accrual 
concept, profit or loss for an 
accounting year is not based 
solely on cash receipts and 
payments during that year. 
This fundamental principle 
necessitates various 
adjustments.
Timing Differences
Some receipts and expenses 
in the current year may 
partially relate to the 
previous year or to the next 
year, requiring proper 
allocation to the correct 
periods.
True and Fair View
Without proper adjustments, 
the final accounts will not 
reflect the true and fair view 
of the business's financial 
position and performance, 
potentially misleading 
stakeholders.
Need For Adjustments
Insurance Example
An insurance premium of 
1,200 paid on July 01, 2016 
covers 12 months. With the 
accounting year ending March 
31, 2017, only 900 should be 
expensed in 2016-17, with 300 
carried forward to 2017-18.
Salaries Example
Salaries for March 2017 paid 
on April 07, 2017 must be 
recorded as outstanding in 
2016-17 accounts, ensuring 
they're properly matched to 
the period they relate to.
Other Adjustments
Items not recorded daily 
(depreciation, interest on 
capital) must be adjusted 
when preparing financial 
statements to ensure true 
profit/loss and financial 
position.
Closing Stock
1
Definition
Closing stock represents the cost of unsold goods 
lying in stores at the end of the accounting period. 
It's a crucial adjustment that impacts both the 
trading account and balance sheet.
2
Adjustment Method
The adjustment is done by crediting closing stock to 
the trading and profit and loss account, and showing 
it on the asset side of the balance sheet.
3
Future Treatment
The closing stock of the current year becomes the 
opening stock of the next year and appears in the 
next year's trial balance.
4
Alternative Method
Sometimes opening and closing stock are adjusted 
through the purchases account, resulting in adjusted 
purchases which are shown on the debit side of the 
trading account.