7 Meaning of Financial Statements- Need or Importance and Limitations of Financial statements.

Financial Statements

Financial statements are those statement which includes the income statement, balance sheets, statement of retained earnings and the statement of sources and uses of funds. The income statement includes the trading account and the profit & loss account of the business concern and the balance sheet includes the assets and liabilities of the business.

The financial statement provides the vital information relating to the profitability, liquidity and solvency of the business.  The main aim of the financial statement is to provide reliable information relating to the economic resources, business obligations, changes in net resources etc.

Need or Importance of Financial Statements.

The need or importance of financial statement is to satisfy the needs of the users of the financial statements and which provides relevant information's about the business to the interested parties like Government, management, creditors, share holders etc. The importance of Financial statements are as follows:-

1.      Importance to Management

In the competitive business environment, it is difficult to sustain the business without any advanced planning or forecasting. The financial statements helps the management to know about the current position of the business as up to date, accurate and systematic information relating to the business. It enables the management to identify the current position, progress of the business and the business prospectus which leads the managers to take necessary remedies and plans to develop the business environment.

2.      Importance to Share holders.

In the case of companies, management is separated from the ownership of the organisation and the share holders are not authorized to take part in the day to day business activities of the concern. But in the Annual General Meeting, the results and activities of the concern will be reported to the shareholders in the form of financial statements. This financial statements enables the shareholders to know about the performance of the management and it will give the relevant information of the effectiveness, efficiency and the current financial position of the business also.

3.      Importance to Leaders or Creditors

The financial statements provides the useful information or guide to the suppliers or the creditors of the company. This is done with the help of critical evaluation of the financial statements and which provides the clear idea about the liquidity, profitability and the solvency of the business enterprises.

4.      Importance to Labour

The financial statement provides the profit and loss account of the business. This enables the staff to identify the profit condition of the business and helps to negotiate for the better salary because the profit of the company depends on the salary for the staffs.

5.      Importance to the public

Every business is a social entity which includes the co- operation of the various groups which includes lawyers, trade unions, financial analysts, teachers, research scholars etc. These groups are intended to know the financial position of the business and this will be available only through the financial statements.

6.      Importance to National Economy

The economic development of a country is highly depends on the growth and development of business environment. Financial statement discloses the relevant details of the business to the needy and this is importance to the tax authorities and other statutory aspects in the country.

These all are the importance of the Financial Statements of a business organization.

Limitations of Financial Statements.

The important limitations of financial statements are as follows:-

1.      In formations provided through the financial statements will be incomplete and inexact.

2.      The qualitative information may be ignored in the financial statements.

3.      Financial statements provides historical data.

4.      The financial statements are based on the accounting concepts and conventions.

5.      Personal judgments will be affected to the financial statements.

These all are the important unavoidable limitations of the financial statements.

3 Meaning of Depreciation in accounting with the Objectives, the causes and Methods of depreciation.

Depreciation

Depreciation refers to the decline of the value of any kind of property due to use, normal wear and tear, obsolescence or efflux ion of time. Depreciation of any kind of assets or property are allocated so as to charge a reasonable proportion of the depreciable amount in each accounting period during the expected useful life time of the asset.

Objectives  of providing Depreciation

The main objective of providing depreciation to the concerned property are as follows:-

1.      To ascertain true profit of the business.

2.      To show the proper value of assets.

3.      To retain the capital In tact.

4.      Provision of depreciation is a statutory need for the business.

Causes of Depreciation of Assets

The main reasons for the depreciation of the value of assets are as follows:-

1.      Physical Deterioration which includes normal wear and tear, rust of assets without using, wind, rain, sun and other elements of nature.

2.      Economic Factors like Obsolescence and inadequacy.

3.      Time factors which includes the reduction of value simply by passing of time.

4.      Depletion which means the lose of value due to the use such as coal mines, ore and oil deposits etc.

Methods of Depreciation

To find out the depreciation of assets or any kind of property, there are different forms or kinds of methods are available. The different kinds of depreciation methods are as follows:-

1)      Fixed Installment or Straight line method.

2)      Diminishing Balance or written down value method.

3)      Sums of the digit method

4)      Annuity method

5)      Depreciation fund or Sinking fund method

6)      Insurance policy method

7)      Revaluation method

8)      Activity method

1.      Fixed Installment or Straight line method.

Under this method, an equal amount of the value of asset is allocated as depreciation in each accounting year over a period of its effective life time. The depreciation will be calculated up to the salvage of the value of assets.

2.      Diminishing Balance or written down value method.

Under this system, depreciation will be calculated as a certain percentage of the value of the assets. This will be shown as reduced in the books of depreciation.

3.      Sums of the digit method.

Under this system, uses a constantly reducing rate to calculate the depreciation of assets. This is similar to the straight line method which means, this uses a constant system to calculate the value of assets. This uses some digits to find out the amount of depreciation in each year.

4.      Annuity method.

Under this system, the purchase amount is assumed as the investment and the interest from that investment also will be considered in the case of calculation of depreciation of assets.

5.      Insurance policy method

Under this system, an insurance policy will be taken for the assets and this matures when the assets are replaced.

6.      Revaluation method

Under this system, the reduction of the value of assets will be treated as the depreciation for the concerned assets.

7.      Activity method.

Under the activity method, usage of assets is given more importance than the passage or efflux ion of time for assets of any kind of property. The activity may take place in different forms or kinds they are as follow;

·        Production Unit Method

·        Machine Hour Method

·        Service Unit Method

·        Depletion Method.

These all are the different kinds of Method of Depreciation.

8 Meaning of Balance sheet and Classifications of Assets and Liabilities.

Balance Sheet

Balance sheet is a statement of assets and liabilities as on a particular date.  The balance sheet shows the sources and applications of capital. On the left hand side of the balance sheet shows the liabilities and capital and the right hand side of the balance sheet shows all the assets. Both sides of the balance sheet should be always equal, that means, assets must be equals with liabilities.

Format of Balnce sheet

Format of Balance Sheet

Classification of Assets and Liabilities

The classification of different assets and liabilities are as shown below;

Classification of Assets

Assets represents the possession and properties of the business. The assets are the valuable things which owns the business. Some of the examples of the Assets are land & building,Furniture, plant & machinery, stock, cash, debtors etc. As per the nature of assets they are classified in to the following types.

1.       Fixed Assets

Fixed Assets are those Assets which are acquired and held permanently and is used for the future with the intention of earning profits. Land & building  Furniture, plant & machinery are some of the examples for fixed assets.

2.       Current Assets

Current assets are those assets which can be converted in to cash or can be used for the process of production of goods and services. Cash, stock,debentures etc are some of the examples for current assets.

3.       Liquid Assets

Liquid assets are those assets which are in the form of cash or can be easily converted in to cash. Cash, debenture, bills receivables are some of the examples for Liquid assets.

4.       Tangible Assets

Tangible assets are those assets which can be seen and touch and have a definite volume such as cash, stock etc.

5.       Fictitious Assets

These are assets which have no real value and are losses for the business. Examples of fictitious assets are p&L a/c debit balance, preliminary expenses etc.

6.       Wasting Assets

Assets which have exhausted or reduces in value by their workings are called Wasting Assets. Examples for Wasting assets are mines , quarries etc.

7.       Contingent Assets

These are assets the existence, value and ownership of this is depends on the occurance and non occurance of a specified act or an uncertain future event.

Classification of Liabilities

Liability is a claim in which the business owes. This includes the credit balance of personal accounts, real account and the owners capital. Liabilities are classified in four categories. They are as follows:-

1.       Fixed Liabilities

Fixed liabilities are those liabilities which are payable only on the termination of the business. This includes the owners paid up capital, reserves and surplus etc.

2.       Long term Liabilities

Long term liabilities are those awhich are payable only after a long period of time say five to ten years.

3.       Current Liabilities

Current Liabilities are those which will be payable out of current assets within the next accounting period usually a year.

4.       Contingent Liabilities

Contingent liability is one which is not an actual liability but it will become an actual on the occurance of some future uncertain event.

These all are the kind or classifications of Assets and Liabilities in the balance sheet of a business.

10 Meaning and Types of Subsidiary books detailed study report.

Subsidiary Books

Most of the big companies are recording the business transactions in one journal and the posting of the same to the concerned ledger accounts are very difficult tasks and which require more clerical labour also. For avoiding such kind of difficulties most of the business organizations are subdividing the journal in to subsidiary journals or subsidiary books.  Subsidiary books are those books of original entry in which similar nature of transactions are recording in a chronological order.

Kinds of Subsidiary Books

There are different kinds of subsidiary books which includes purchase day book, Sales day book, purchase returns book, Sales returns book, Bills receivable books, Bills payable books, Cash book.

1.       Purchase day book

purchase day book is used for recording credit purchase of goods only. This will not record any cash purchase or credit purchase of any assets. The term goods means all the commodities and services in which the company deals in day to day activities. The preparation of purchase day book involves the Date column, Particulars column, Invoice number column, Ledger folio column, inner amount column and Amount column.

2.       Sales day book

Sales day book is mainly used for recording credit sales of goods and services in an organization. This will not record any cash sales or assets sales. The ruling for the preparation of this book is same as like Purchase day book. This involves the Date column, Particulars column, Invoice number column, Ledger folio column, inner amount column and Amount column.

3.       Purchase returns book

This is maintained to record the transactions of goods returned to the supplier when purchase on credit. The ruling of the preparation of purchase return book or returns outward book involves Date, Particulars, Debit note number, Ledger folio and amount column.

4.       Sales returns book

This book is used to record the goods returned by the customer the goods sold on credit. The ruling of the preparation of Sales return book or returns inward book involves Date, Particulars, credit note number, Ledger folio and amount column.

5.       Bills receivable books

It is used to record the transactions when the bills received from the customer for credit sales. This provides a medium for posting bills receivable transaction. The preparation of this book involves Date when received, Drawer, Acceptor, Where payable, date of bill, term, due date ledger folio, Amount, remarks columns.

6.       Bills payable books

This is used to record the acceptances given to the suppliers for credit purchase. The preparation of bills payable book involves Date of acceptance, giver, payee, Where payable, date of bill, term, due date, ledger folio, Amount, remarks columns.

7.       Cash book

The cash book is used to record all the receipts and payments of cash. For the preparation of cash book there are different rules are available according to the nature of business. The different forms of cash book are as follows:-

a.       Simple Cash book – This is the simple form of cash book.

b.      Two column cash book – This type of cash book have two columns like cash column and discount column.

c.       Three column cash book – This involves three columns such as Bank column, cash column and discount column.

d.      Petty cash book -  This is used to record petty expenses like postage, cartage, printing and stationery etc in the day to day business activities.

66 Functions of financial management as well as financial manager.

Financial Management

       

Financial management is a process which involves planning, organizing, controlling and directing of financial activities such as the procurement, development and maximum utilization of the funds in an organization. Finance is the lifeblood of every business and it is the study of how the investors allocate the assets in the competitive business environment. In simply we can say that, financial management is the process of applying general management principles to the resources available in the business enterprises.

Functions of Financial management

Financial Management is the base for the success of every business organizations and which includes all the managerial activities related to the finance and other resources of the business. The main objective of the financial management is concerned with the procurement, allocation and control of financial resources in an organization. Some of the important functions of financial management are as follows:-

1. Estimation of Capital requirements.

The estimation of capital requirements for the business is the main responsibility of a financial manager. Capital is the indication of the structure and future plans of the business. The capital requirements should be depends on the nature and characteristics of the business. If the business is a short term plan then it will have a small capital requirements or the type of the business also will depend the capital requirements of the company.

2.      Determine the capital composition

Determination of the capital composition involves the process of deciding the short term and long term capital structure of the business along with the debt equity analysis.  This process will depends on the proportion of the companies equity capital as well as the additional funds in which the company have to be raised from the outsiders. The estimation is the base for fixing of capital structure for the business.

3.      Sources of Funds     
Another important function of a financial manager is to analyze the external environment and find out the favorable choices for procuring funds for the future process of business activities. Some of the main choices of source of funds are as follows:-

a)      Issue of shares and Debentures.

b)     Loans from banks and other financial institutions.

c)     Fund from Bonds.

4.      Investment of Funds

Investment of funds is the very important function in any business organization. This is the main responsibility of the finance manager to analyze and study various profitable ventures to invest the funds and it will help to get maximum return from the investment.

5.      Disposal of surplus

The finance manager is the responsible person to take adequate decisions regarding net profit of the company. It will be done in two ways, that is Dividend Declaration and Retained profits.

6.      Management of Cash.

The key function of a finance manager is cash management and this depends on the future functions in an organization. Cash is required for many purposes in every business organization which includes payment of wages and salaries, purchases, Payment of bills, Meeting current liabilities etc.

7.      Financial Controls

The financial control is one of the major function of the finance manager along with the procurement and utilization of finance. The financial control is done through the clear forecasting of future conditions, Ratio analysis techniques, forecasting of cost and profit of the business etc.

These all are the major functions of financial management as well as the financial manager.