Financial
Statements
Question A.1:
Answer in one sentence.
What is meant by Final Accounts?
ANSWER:
Final accounts are the accounts that are prepared at the end of the accounting period in
order to assess the profitability and financial position of a firm. They include two statements:
Income Statement (Trading and Profit & Loss Account) and Statement of Financial Position
(Balance Sheet).These are also called financial statements.
Question A.2:
Answer in one sentence.
Why is Trading Account prepared?
ANSWER:
A Trading Account is prepared to ascertain the trading results of a firm in the form of gross
profit earned or gross loss incurred as a result of buying and selling of goods during an
accounting period. It is a nominal account in which the opening stock, purchases and all
direct expenses are recorded on the debit side, whereas sales and closing stock are
recorded on the credit side. Excess of the credit side over the debit side is regarded as
gross profit and excess of the debit side over the credit side as gross loss.
Question A.3:
Answer in one sentence.
What is gross profit?
,ANSWER:
Gross profit means the difference between net sales and cost of goods sold. Opening
Stock, purchases and all direct expenses are recorded on the debit side of the Trading A/c,
whereas sales and closing stock are recorded on the credit side of the Trading A/c. Thus,
excess of the credit side over the debit side is termed as gross profit. Thus, gross profit
states that operating revenues exceed the operating expenses of the firm.
Question A.4:
Answer in one sentence.
Why is Profit & Loss Account prepared?
ANSWER:
A Profit & Loss Account is prepared to ascertain the net results of a firm in the form of net
profit earned or net loss incurred during an accounting period. It is a nominal account that
records all the indirect incomes and expenses of the business. All the expenses are debited
and incomes are credited to this account. A Trading Account reveals the operating profit
only but a businessman is interested to know the overall business profit or loss during the
year. Hence, a Profit & Loss Account is prepared to know the net profit or net loss of the
business during a year.
Question A.5:
Answer in one sentence.
What do you mean by net profit?
ANSWER:
Net profit means the excess of the credit side over the debit side. All the indirect expenses
are recorded on the debit side and all the indirect incomes are recorded on the credit side.
Thus, net profit means the excess of incomes over expenses.
Question A.6:
Answer in one sentence.
Explain the term net purchases.
ANSWER:
Net purchases means the difference between the purchases and purchases return.
Purchases means the goods bought for resale in a business and purchases return means
,the goods returned to a supplier. It can be expressed as follows:
Net Purchases = Purchases – Purchases Return
Question A.7:
Answer in one sentence.
What do you mean by prepaid expenses?
ANSWER:
Prepaid expenses are the expenses that have been paid in advance for the next year during
the current year. Prepaid expenses are the assets of a business and shown under the head
of Current Assets because the benefit from them will be accrued in future. For example:
Insurance premium worth Rs 6,000 is paid in the month of June 2013, for full year. Books
are closed on 31st March every year. Thus, Rs 1,500 will be treated as prepaid expenses, for
the current year 2013.
Question A.8:
Answer in one sentence.
What do you mean by prereceived income?
ANSWER:
Pre-received income means that portion of the income, which is received in the current year
but belongs to the next year. It is also known as the income received in advance or
unearned income. For example, interest income of Rs 4,500 is received in the current year,
but out of this, half the amount belongs to the next year. Thus, Rs 2,250 is termed as the
pre-received income or income received in advance.
Question A.9:
Answer in one sentence.
Explain the term accrued income.
ANSWER:
Accrued income is that income which is earned during the accounting year but not received
in the same year. It is also known as income receivable. For example, rent is to be received
@ Rs 2,000 per month. During the year, rent received is Rs 22,000. In this case, the rent for
one month, i.e. Rs 2,000, is still to be received and, thus, it is considered as accrued
income or rent receivable.
Question A.10:
, Answer in one sentence.
What do you mean by bad debts?
ANSWER:
Bad debts are the amount that is owed from the debtors and written-off, as it becomes
irrecoverable. It is a loss for a business and, therefore, it is shown on the debit side of the
Profit & Loss Account.
Question A.11:
Answer in one sentence.
What is capital?
ANSWER:
Capital is the amount invested by a proprietor in a business enterprise. It is also known as
owner’s equity or net worth or net assets. It can be calculated as the difference between the
assets and liabilities of a business, which can be written as follows:
Capital = Assets-Liabilities
It is considered as a liability for the business because business is a separate entity.
Question A.12:
Answer in one sentence.
State the meaning of current assets.
ANSWER:
The assets that can be easily converted into cash within one year during the normal course
of business are termed as current assets. These assets are acquired by a firm for the
purpose of resale in the business and are held for a short period of time. For example,
debtors are regarded as current assets of a business as these are expected to be converted
into cash within a short period of time.
Question B.1:
Give one word/term or phrase for each of the following statements.
Statement Showing financial position of business.
ANSWER:
Statements
Question A.1:
Answer in one sentence.
What is meant by Final Accounts?
ANSWER:
Final accounts are the accounts that are prepared at the end of the accounting period in
order to assess the profitability and financial position of a firm. They include two statements:
Income Statement (Trading and Profit & Loss Account) and Statement of Financial Position
(Balance Sheet).These are also called financial statements.
Question A.2:
Answer in one sentence.
Why is Trading Account prepared?
ANSWER:
A Trading Account is prepared to ascertain the trading results of a firm in the form of gross
profit earned or gross loss incurred as a result of buying and selling of goods during an
accounting period. It is a nominal account in which the opening stock, purchases and all
direct expenses are recorded on the debit side, whereas sales and closing stock are
recorded on the credit side. Excess of the credit side over the debit side is regarded as
gross profit and excess of the debit side over the credit side as gross loss.
Question A.3:
Answer in one sentence.
What is gross profit?
,ANSWER:
Gross profit means the difference between net sales and cost of goods sold. Opening
Stock, purchases and all direct expenses are recorded on the debit side of the Trading A/c,
whereas sales and closing stock are recorded on the credit side of the Trading A/c. Thus,
excess of the credit side over the debit side is termed as gross profit. Thus, gross profit
states that operating revenues exceed the operating expenses of the firm.
Question A.4:
Answer in one sentence.
Why is Profit & Loss Account prepared?
ANSWER:
A Profit & Loss Account is prepared to ascertain the net results of a firm in the form of net
profit earned or net loss incurred during an accounting period. It is a nominal account that
records all the indirect incomes and expenses of the business. All the expenses are debited
and incomes are credited to this account. A Trading Account reveals the operating profit
only but a businessman is interested to know the overall business profit or loss during the
year. Hence, a Profit & Loss Account is prepared to know the net profit or net loss of the
business during a year.
Question A.5:
Answer in one sentence.
What do you mean by net profit?
ANSWER:
Net profit means the excess of the credit side over the debit side. All the indirect expenses
are recorded on the debit side and all the indirect incomes are recorded on the credit side.
Thus, net profit means the excess of incomes over expenses.
Question A.6:
Answer in one sentence.
Explain the term net purchases.
ANSWER:
Net purchases means the difference between the purchases and purchases return.
Purchases means the goods bought for resale in a business and purchases return means
,the goods returned to a supplier. It can be expressed as follows:
Net Purchases = Purchases – Purchases Return
Question A.7:
Answer in one sentence.
What do you mean by prepaid expenses?
ANSWER:
Prepaid expenses are the expenses that have been paid in advance for the next year during
the current year. Prepaid expenses are the assets of a business and shown under the head
of Current Assets because the benefit from them will be accrued in future. For example:
Insurance premium worth Rs 6,000 is paid in the month of June 2013, for full year. Books
are closed on 31st March every year. Thus, Rs 1,500 will be treated as prepaid expenses, for
the current year 2013.
Question A.8:
Answer in one sentence.
What do you mean by prereceived income?
ANSWER:
Pre-received income means that portion of the income, which is received in the current year
but belongs to the next year. It is also known as the income received in advance or
unearned income. For example, interest income of Rs 4,500 is received in the current year,
but out of this, half the amount belongs to the next year. Thus, Rs 2,250 is termed as the
pre-received income or income received in advance.
Question A.9:
Answer in one sentence.
Explain the term accrued income.
ANSWER:
Accrued income is that income which is earned during the accounting year but not received
in the same year. It is also known as income receivable. For example, rent is to be received
@ Rs 2,000 per month. During the year, rent received is Rs 22,000. In this case, the rent for
one month, i.e. Rs 2,000, is still to be received and, thus, it is considered as accrued
income or rent receivable.
Question A.10:
, Answer in one sentence.
What do you mean by bad debts?
ANSWER:
Bad debts are the amount that is owed from the debtors and written-off, as it becomes
irrecoverable. It is a loss for a business and, therefore, it is shown on the debit side of the
Profit & Loss Account.
Question A.11:
Answer in one sentence.
What is capital?
ANSWER:
Capital is the amount invested by a proprietor in a business enterprise. It is also known as
owner’s equity or net worth or net assets. It can be calculated as the difference between the
assets and liabilities of a business, which can be written as follows:
Capital = Assets-Liabilities
It is considered as a liability for the business because business is a separate entity.
Question A.12:
Answer in one sentence.
State the meaning of current assets.
ANSWER:
The assets that can be easily converted into cash within one year during the normal course
of business are termed as current assets. These assets are acquired by a firm for the
purpose of resale in the business and are held for a short period of time. For example,
debtors are regarded as current assets of a business as these are expected to be converted
into cash within a short period of time.
Question B.1:
Give one word/term or phrase for each of the following statements.
Statement Showing financial position of business.
ANSWER:
