Accountancy Part II

NCERT Class 11 Accountancy Chapter 1 (Financial Statements – I) covers the preparation of the trading and profit and loss account and balance sheet for a sole proprietary firm, along with stakeholder information needs and the capital-revenue distinction.

• 1Financial statements comprise the trading and profit and loss account and the balance sheet, both prepared from the trial balance.
• 2Capital expenditure benefits the business for more than one accounting year and is recorded in the balance sheet; revenue expenditure benefits only the current year and is charged to the profit and loss account.
• 3Capital receipts carry an obligation to return money (e.g., loans, additional capital) or arise from sale of fixed assets; revenue receipts carry no such obligation (e.g., sales, interest received).
• 4Gross Profit = Sales – (Purchases + Direct Expenses); Net Profit = Gross Profit + Other Incomes – Indirect Expenses.
• 5Operating profit (EBIT) = Net Profit + Non-Operating Expenses – Non-Operating Incomes; it excludes financial charges such as interest and abnormal items such as loss by fire.

Financial Statements - II in NCERT Class 11 Accountancy covers the adjustments required when preparing the trading and profit and loss account and balance sheet, including outstanding expenses, prepaid expenses, depreciation, bad debts, provisions, manager's commission, and interest on capital.

• 1Adjustments are required because the accrual concept demands that revenues be recognised when earned and expenses when incurred, not on a cash basis.
• 2Eleven standard adjustment items are covered: closing stock, outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, bad debts, provision for doubtful debts, provision for discount on debtors, manager's commission, and interest on capital.
• 3Outstanding expenses (e.g., unpaid wages or salaries) are added to the related expense in the profit and loss account and shown as a current liability on the balance sheet.
• 4Prepaid expenses are deducted from the related expense in the profit and loss account and shown as a current asset on the balance sheet.
• 5Depreciation is debited to the profit and loss account and shown as a deduction from the concerned asset on the balance sheet.