Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.
In the last session we learn how to do payroll postings.
What are the parties involved in payroll?
How to record payroll?
What is the entry when we pay the payroll?
So all these we learned about payroll.
transactions while posting and and while payment. Ok?
Today we will learn about financial statements.
If we talk about financial statements, you might get asked in MCQ, “what is a financial statement?”
And you may get 4-5 options but you need to write that the financial statement always covers only these 4 points.
This covers only these 4 statements.
One is a profit and loss account.
Second is the balance sheet.
Which means financial position which is shown by the balance sheet.
Third is notes to account.
Fourth is the cash flow statement.
According to the scale of the business and its turnover, the government decides how you have to make your financial statement.
Generally cash flow statements are not applicable to every company.
But the big companies like scale one and scale two companies, of which the government has decided the threshold, threshold means government decides a limit, if the turnover of the company is xyz, then it needs to make a cash flow statement.
If we talk about financial statements then the financial statement of any company covers only 4 things, fourth which is the cash flow statement is optional.
If you touch the threshold limit and if you have the turnover which is decided by the government then a cash flow statement is applicable to you.
Or else you have only these three things.
Profit and loss account
Notes to account
if we see the financial statement of any business, small or big.
I am talking about the financial statement.
Do not get confused between financial statements and annual reports.
We are talking about financial statements !
Financial statement of any company will cover minimum these three things,
Profit and loss account
Notes to account
First let us know about the balance sheet.
What does a balance sheet show?
Title of the balance is “balance sheet as on date”
Which means the report of the day which you are reading or making, what is the position of the balance for the same day ?
What is the position of the business?
Do they have more assets or liabilities? ok?
Second is the profit and loss account.
The year for which you are creating the annual report or financial statement, what is the profit or the loss for the same year?
This is for the whole year.
What is the third one?
Notes to accounts.
Now what are notes to account?
Generally assumptions are taken to prepare financial statements.
Notes might have been written.
Policies may have been decided.
So where can you show these policies, notes, estimates?
In notes to accounts.
The balance sheet and the profit and loss account in the financial statement will have numeric figures.
But apart from the figures, there might be some more things affecting your business.
And you want to explain those things to the person reading your financial statement.
You are saying that the balance sheet and profit and loss account is fine but there are some more things that I will disclose in notes to accounts.
read those for better clarity.
For instance you made a financial statement from April 2020 to 31st march 2021.
Now what happened after you made the financial statement, your factory caught fire.
And your stock was destroyed completely.
Now you might not have much profit for the next few years and you may not have the expected business.
And you want to show this thing through a financial statement, but the financial statement is already made. Ok?
And you have disclosed everything till 31st march.
Like your profit, balance sheet situation.
Now what if someone reads the stand account, And you did not disclose in notes to account that after 31st march, your factory had a fire breakout where maximum stock was destroyed.
Then your financial statement will not show true and fair value.
What is a stakeholder?
Stakeholder means the ones who keep stake or interest in your business.
Stakeholders can also be your customers, vendors, suppliers, obviously the government also because it will look into your statement.
And will know how much and how you are earning the profit, only then the taxation will come.
Stakeholders can be your employers, your shareholders if your company is listed in stock market.
Those Shareholders can also be your stakeholders.
So a financial statement is not made only for your purpose.
If you have a listed company, how many stakeholders can we have?
Multiple stakeholders because many people can have interest in your business.
For instance your shareholders.
Every shareholder hopes that the company performs well of which he has bought the share.
So this also has the stake, that shareholders will invest in you only when you will perform well.
Next is about the government.
Government needs to ensure that you are not hiding the income.
You submitted the financial statement but the government cannot come to you on a day to day basis to check how much business you are doing.
So the government only has your financial statement. Ok?
Sometimes you might happen to take a loan from the bank.
so you need to submit the financial statement about the bank also.
Bank also has interest in you.
So Even bank is concerned about your business, If your business is growing or not.
So how will the bank get to know?
Through your financial statement.
So a financial statement you are making not only for yourself, but also for multiple people.
For different stakeholders.
So whenever you make a financial statement, you will keep the interest of all these people in your mind.
Only then you will create a financial statement.
See i know, I can see the figures from the balance sheet and profit and loss account, but Important part is notes to accounts.
For example fixed assets.
Suppose I have multiple fixed assets.
Now what will come on the balance sheet?
Only the cost & total amount of depreciation.
And total depreciation amount in profit and loss account.
I will not be able to know how I calculated the depreciation and Depreciation policy.
Like the Straight line method or Written down method.
Like I have multiple slots, plant and machinery, Motor vehicle, Office equipment, computer equipment, Also the furniture fixtures.
So I will not know which depreciation policy and what rate I have calculated on which asset.
How can I know all this?
Through notes to accounts.
Suppose the closing stock.
How did I do valuation for closing stock?
Through market value, cost value or suppose a third party came and did valuation for my stock.
Where can we show all this?
in notes to account.
Now you can understand the most important part of a financial statement.
Balance sheet and profit loss With the addition of notes to account.
Notes to accounts offers clarity for reading the balance sheet and profit and loss account.
So reading notes to account before analyzing the balance sheet and profit and loss accounts of a company is equally important.
So as i told you today there you will find
Stock value - how the stock is calculated,
the transactions with related party like your relatives ( brother or son) or business related relatives, during the year of which you have created the financial statement
So according to the company law, that related party needs to be disclosed.
And needs to be stated that xyz goods are sold or purchased to vendor or supplier abc during the year. Ok?
And this exchange is done on market value.
So where should all these disclosures come?
In notes to account. Okay?
In the balance sheet only the total number of debtors will be visible.
Now among these debtors, how much trade debtors do I have?
What are the deposits? only If the one has given.
If I have given the advance to somebody then what are those advances?
So where will all these be visible?
In notes to account.
Do we have anything else except four of these in the financial statement?
NO! We have only these four.
Sometimes to confuse you what can be given in MCQ?
“Financial statement also includes general ledger”
See journal posting and general ledger are ledgers ok?
Here we are talking about financial statements not about books of accounts.
Understand the difference between these two.
Books of accounts means the books that you prepare for writing accounts.
And financial statements means the one which we prepare from the books of accounts.
Financial statements are for 1 year.
And it shows the financial position and performance of the year for which it is created.
Whereas you use books of accounts on a daily basis.
Where you do transaction posting day to day, preparation of ledger, entries in ledger, recordings, postings, and creating trial balance after closing ledger on year end, and then creating financial statements from it.
Which means financial statements and books of accounts are not the same.
If you ask for books of account then you will get transactions of the whole year.
And in the financial statement you will mainly get these 3 things, and the fourth cash flow statement is optional.
I hope you are able to understand me.
You won't find anything else except these 4 .
No bank register.
No cash register.
No general ledger.
Generally what happens when you opt for an interview exam or for MCQ exam.
You might have the very first question as “what is a financial statement?”
Then you can mention financial statement is a statement which includes
Profit and loss account
Notes to account
Cash flow statement if any
Do write “if any” for a cash flow statement.
Because this is not applicable for every business.
We do not have anything except these four.
Rest we have as annexures.
Annexures are used when a company wants to give extra information.
Extra information can be for stakeholders.
Suppose a situation during an ongoing case in court.
Like if a patent case is going on me that I have stolen somebody’s patent.
Yet the case is pending in the court.
And you want to tell the developments that happened last year. Ok?
If you want to give such extra information then where can you give?
Even if you want to say the same thing in detail or other things like xyz are total debtors but among those, abc number of debtors are negative.
So where can I tell this?
You can make annexures separately. Ok?
Those annexures won’t be part of the financial statement.
If you have any queries or comments, click the discussion button below the video and post there. This way, you will be able to connect to fellow learners and discuss the course. Also, Our Team will try to solve your query.
In the next session we will see one financial statement practically.
And we will try to analyze the financial statement.
See if you go for an interview to a hard or senior position then you are given a financial statement and you are asked to analyze the same.
Which means they will ask for the information that you can extract from the financial statement.
So what will we do in the next session?
We will see practically what the financial statement is.
We will see its structure and what are the things included in it?
Until then thankyou.
Very good initiative .
Siddharth Nair R
I belong to science background and have almost zero knowledge of accounting but after starting the course I am gaining knowledge from the scratch as it is beautifully explained.
its quite easy to learn here
RAJESH KUMAR SAMOTA
Very good course
Amazing course content and easy to understand.Your English speaking and voice of tone is very good which a teacher needs.
Ali Kamel Abd El Aziz
The course is very important for the beginner to learn and practice. Instruction given by instructor is very easy to understand.