Book Recommended: ULTIMATE BOOK OF ACCOUNTANCY (By Dr.

Vinod Kumar, Vishvas Publications)

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CBSE Quick Revision Notes and Chapter Summary

Class-11 Accountancy
Chapter 8 Financial Statements of Sole Proprietorship: From Complete and Incomplete Records

Meaning
Financial Statements are prepared for the purpose of presenting a periodical review or report on
progress made by the management and deal with the status of investment in the business and the
results achieved during the period under review.

Users of Financial Statements :

Parties interested in Financial Analysis
Internal Users
1. Proprietors: The proprietors or owners of the business need to know the Profitability and
Financial Position of the business. Because the Capital is contributed by the owners and they
take risk of this capital. Financial Analysis helps the owners to estimate the trading results of the
business, its financial position at the end of the accounting period and future prospects of the
business.

2. Management: Financial analysis is helpful for the management for planning and controlling
purposes. Through the financial analysis, management can take important decisions to improve
the efficiency and thereby increase the profits of the enterprise.

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3. Employees: Employees are very much interested in the financial analysis of the financial
statements. Financial analysis helps them to know the profitability of the business. Good results
of the business activities as revealed by financial records provide a great satisfaction to
employees as their bread and butter depend on these results. In those business concerns in
which profit sharing schemes are introduced, employees become very much interested in
knowing how the profit has been ascertained.

External Users
1. Creditors: They want to know the profitability and financial position of the business. They have
advanced some money or moneys worth to the business and their fate is sealed to the
prosperity or the business concern. Sound financial position of the business will win their faith for
further credit and this they can know from accounting information.

2. Investors: It is only after getting a detailed information about the profitability of the concern that
investors take decisions regarding investment to be made in that particular business. Accounting
information is of great use to them in this connection.

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3. Government: Government is very much interested to know the profitability and financial position
of the business (for the proper assessment of tax liability of the business)

4. Researchers: Financial Statements of various enterprises are of great use to research scholars
to complete their research work.

5. Competitors: They are interested to know the profitability of the business.

6. Taxation Authorities: Taxation authorities also need accounting information for the proper
assessment of tax liability.

Limitations of accounting
(a)

No record of important nonmonetary information

(b)

Window Dressing

(c)

No consideration of price level changes

(d)

Lack of uniformity in recording methods

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(e)

Subjective approach

(f)

Conservative approach

(g)

Postmortem analysis of past records

Capital and Revenue Expenditure

Outlay resulting in the increase or acquisition of an asset or increase in the earning capacity of the
business are capital expenses. An expenditure charged against operation: a term used to contrast
with capital expenditure

Deferred revenue expenditure

Where a certain revenue expenditure is of such a nature that its benefit is not completely
exhausted in the year is which it is incurred, or where a revenue expenditure is large in amount
and in non- recurring, it may be spread over a number of years a proportionate amount being
charged to the profit and loss account of each year. The balance of such expenditure which is
carried forward to subsequent years is known as deferred revenue expenditure

Trading Account
The Trading Account shows the results of buying and selling of goods, in preparing this account,
the general establishment charges are ignored and only the transactions in goods are included.

Profit and Loss A/c

A profit and loss account is an account into which all gains and losses are collected in order to
ascertain the excess of gains over the losses or vice versa.

Balance Sheet
Balance sheet is a list of assets and liabilities accounts. This list depicts the position of assets and
liabilities of a specific business at a specific point of time. It is a statement of assets and liabilities
though the balance sheet has debit and credit balance but its sides are named as assets and
liabilities. The left hand side is a liability representing credit balance. Right hand side is assets
representing debit balance.
CLOSING ENTRIES
All the accounts related to expenses and gains are closed at the end of the year. In order to
close these accounts, there are transferred either to trading A/C or profit and loss A/C. Journal
entries required for transferring them to these accounts are closing entries with the help of
trading A/C, the following A/Cs are closed.
(iii) Opening stock, purchases, sales returns and all direct expense i.e carriage, fright, octroi,
factory expenses etc will be transferred to trading A/C as

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Trading A/c..............................Dr.
To opening stock A/c
To purchases A/c
To sales return A/c
To carriage A/c
To fright A/c
To factory expenses A/c
(being the various accounts transferred to trading account)
(ii) Sales account, purchases returns account and closing stock account have got credit balance, so
to close these accounts, these will be debited and trading A/C will be credited
Sales A/c ...............................Dr.
Purchase return A/c ........Dr.
Closing stock A/c ..............Dr.
To Trading A/c
(being the various accounts transferred to trading account)
(iii) If there is gross profit it will be credit to profit and loss account as shown below
Trading A/c.................Dr.
To profit and loss A/c
(being gross profit transferred to profit and loss A/C)
In case of gross loss the above entry will be reversed

Accrual Concept
In accounting we follow the Accrual Concept, and according to Accrual Concept there may be some
Income and Expenses which are still to be brought into the books of accounts. So It is compulsory
to adjust these items in the Final Accounts, to get the true and fair picture of the business.

Need or importance of adjustments

To know the Actual Profit of the business
To know the Actual Financial position of the business
To know the Actual value of Assets and Liabilities
To Record the unrecorded Assets and Liabilities
To Record the outstanding expenses and incomes
To Rectify the Errors
To Make the Provisions for Bad debts, provision for Tax and for Depreciation

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Adjustments
It is important to adjust each and every item to know the correct profit and the financial position
of the business. Expenditure whether paid or not should be adjusted while preparing the final
accounts. Incomes whether received or not should be adjusted.

Single Entry System

Meaning
As the name indicates, under the Single entry systems of book- keeping , both aspects of every
transaction are not recorded under this system, the personal accounts of the debtors and creditors
are maintained real and nominal accounts are not maintained.
According to Kohler - It is a system of book keeping in which, as a rule, only records of cash and of
personal accounts are maintained, it is always incomplete double entry system, varying with
circumstances.

Features or Characteristics of Single Entry System

1) Maintenance of personal accounts only ;
2) Maintenance of cash book
3) Dependence on original vouchers
4) Incomplete record
5) Limited use
6) Lack of uniformity
7) True profit
8) Preparation of final accounts
Advantages of Single Entry System
(1) Simple
(2) Economical
(3) Economy of time
(4) Easy to calculate profit or loss
(5) Tax Evasion
(6) Flexible
(7) Suitable for small firms

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Disadvantages of Double Entry System

(1) Incomplete and unscientific method
(2) Trial balance is not prepared
(3) Value of assets and liabilities
(4) Comparison
(5) Unacceptable to tax authorities
(6) No internal check.
(7) No knowledge of financial position
(8) Difficulty in obtaining loans

Calculations under Net worth method

Formula of Opening Capital
Capital at the end of the year

.......................

Add; Drawings during the year

......................

Less; Additional Capital introduced during the year ......................

Less : Profit of the year

..

= Opening Capital

xxxxxx

Formula of Profit
Capital at the end of the year .......................
Add; Drawings during the year ......................
Less; Capital in beginning of the year...............
Additional capital invested..................................
Profit of the year

.........................................
OR

The entire process discussed as above may be use in the form of a formula as follows,
Profit = Closing capital + Drawings - Additional capital - opening capital

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