Financial Statements Overview

Financial statements like the Balance Sheet, Income Statement, and Cash Flow Statement provide a snapshot of a business's financial health.

Investors, creditors, and government agencies use financial statements to make informed decisions about a business.

Profitability measures a business's ability to generate profits after covering all expenses.

Liquidity assesses a business's ability to pay its short-term debts on time, ensuring smooth operations.

Solvency refers to a business's ability to pay all its debts if it were to be liquidated or sold off.

The Income Statement (Profit & Loss Statement) reveals a business's revenue and expenses over a specific period, ultimately showing its profit or loss.

The Cash Flow Statement tracks the movement of cash in and out of a business through different activities like operations, investments, and financing.

The Balance Sheet provides a snapshot of a business's assets, liabilities, and equity at a specific point in time, showcasing its net worth.

The amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for.

The reduction in the value of a debtor's account due to the likelihood that the debt will not be collected.

The amount of profit set aside to cover potential future bad debts, based on the accounting principle of 'prudence.'

The legal obligation for businesses to pay a portion of their profits to the government.

The amount set aside for future tax payments, calculated based on estimated profits and tax laws.

A financial statement capturing a company's revenue and expenses over a specific period, ultimately determining its net profit or loss.

The difference between a business's total revenue and total expenses.

Any expense incurred by a business in the course of carrying out its operations.

A financial statement that summarizes a business's revenue, expenses, and profit or loss over a specific period. It helps users understand the financial performance of the company.

The difference between the revenue generated by selling goods and the cost of producing those goods. It represents the profit earned from the core business operations.

Expenses incurred in running the daily operations of a business, such as salaries, rent, and utilities.

Expenses that are not directly related to the core business operations, such as interest expense or income tax.

The final profit or loss that a business earns after deducting all expenses from revenue. It represents the overall profitability of the business.

A financial statement that details the revenue generated and expenses incurred in selling goods. It calculates the gross profit or loss.

A financial statement that summarizes all operating and non-operating expenses and incomes. It calculates the net profit or loss.

The formula used to calculate profit or loss. It involves subtracting total expenses from total revenue.

In accounting, the cost of goods sold (COGS) represents the direct cost of producing goods sold by a company. It includes the cost of raw materials, direct labor, and manufacturing overhead. It's essentially what the company had to spend to create the goods that were sold in a period.

Gross profit is the profit a company makes after deducting the direct costs associated with producing the goods it sells, also known as the cost of goods sold (COGS). This difference showcases the profitability of the company's core business activities.

The Trading Account is a financial statement summarizing the revenue and expenses related to the buying and selling of goods. It highlights the gross profit earned during a period through the sale of inventory.

The golden rule of accounting states that expenses and losses are debited and incomes and gains are credited. This principle helps ensure accurate financial reporting and provides a clear picture of a company's financial position.

Inventory valuation is the process of determining the monetary value of a company's inventory. It involves assigning a value to the raw materials, work-in-progress, and finished goods held by the company.

Different inventory valuation methods, such as FIFO, LIFO, and weighted average, are used to calculate the cost of goods sold and the value of ending inventory. Each method utilizes different assumptions about the flow of inventory, resulting in different cost allocations.

The First-In, First-Out (FIFO) method assumes that the oldest inventory items are sold first, meaning the inventory remaining is valued at the most recent purchase costs. This method is used in industries where the cost of inventory is constantly changing to reflect a more accurate picture of current costs.

The Last-In, First-Out (LIFO) method assumes the newest inventory items are sold first, valuing the remaining inventory at the older, potentially lower, purchase costs. This method reflects the impact of inflation on the cost of goods sold.

In accounting, the cost of goods sold (COGS) represents the direct costs attributable to the production of the goods sold by a company. This includes the cost of the raw materials used, direct labor costs, and manufacturing overhead. Opening stock is considered part of the cost of goods sold for the current period because it represents the value of goods that were purchased in the previous period but were not sold until the current period.

Direct Expenses are the costs that are directly associated with the production of goods or services. They are directly traceable to the cost of a particular product or service and vary directly with the level of output. Rent, rates, and taxes are considered indirect expenses as they are not directly connected to the production of a specific product or service.

Net loss occurs when the total expenses incurred by a business exceed the total revenue generated during a specific accounting period. In this case, the credit side (total expenses) of the profit and loss account is larger than the debit side (total revenue).

Discount received is a reduction in the price of goods or services that a business receives from its suppliers. It is considered an indirect income because it does not directly relate to the sale of goods or services. It's a reduction in the cost of purchases, leading to a higher profit margin.

In double-entry bookkeeping, expenses are recorded on the debit side of the accounting equation. When an expense increases, it means that the business has incurred a greater cost. This is represented by a debit entry, which increases the expense account and decreases the company's assets. The opposite happens when expenses decrease – they are credited, reducing the expense account and increasing assets.

Interest income from investments is considered non-operating income for a manufacturing company. It's not directly related to the primary operations of the company – manufacturing goods. It's an income source that comes from investments that are separate from the core business activities.

A potential obligation that may arise from past events, whose existence is yet to be confirmed based on future uncertain events beyond the company's control.

The capital contributed by the owner of a sole proprietorship business.

The capital contributed by the shareholder of a company. It represents the total value of shares authorized to be issued by the company.

That part of the authorized capital that has been actually issued for subscription by the company. It's the amount for which shares have been sold.

Equity shares are also called residual capital because in a company liquidation, equity shareholders receive the remaining assets after all creditors and preference shareholders have been paid.

Ordinary shares are a type of equity share and carry no preferential rights, meaning they don't receive fixed dividends nor priority in repayment upon liquidation.

These shares are a type of equity share that carries preferential rights regarding the distribution of dividends and repayment of capital during liquidation.

This is a section in the financial statements that shows the various equity components, like share capital and retained earnings.