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Class 12 Accountancy - Company Accounts and Analysis of Financial Statements - Chapter Financial Statements of a Company NCERT Solutions | Explain the process of preparing income

Welcome to the NCERT Solutions for Class 12th Accountancy - Company Accounts and Analysis of Financial Statements - Chapter Financial Statements of a Company. This page offers a step-by-step solution to the specific question from Excercise 2 , Question 8: explain the process of preparing income statement....
Question 8

Explain the process of preparing income statement and balance sheet.

Answer

The process of preparing income statement is explained below

(i) First of all a Trial Balance is prepared on the basis of the balances of various
accounts in the ledger.

(ii) After that trading account is prepared by recording Opening Stock, Purchases, Manufacturing Expenses and other direct expenses on the debit side.

(iii) On the other hand sales and closing stock is recorded on the credit side of the trading account.

(iv) After that the balancing figure of trading account is determined by totalling
both the sides, if the credit side exceeds the debit side, then the balancing figure
is termed as gross profit, but if the debit side exceeds the credit side, then the
balancing figure is termed as gross loss.

(v) Carry forward the Gross Profit (Gross Loss) to the credit (debit) side of the
Profit and Loss Account.

(vi) After that all the operating and non-operating revenue expenditures with
their relevant adjustments are recorded on the debit side of the profit and loss
account. Record all current year’s operating and non operating revenue incomes
with their relevant adjustments on the credit side of the profit and loss account.

(vii) Ascertain the balancing figure by totalling both the sides of the profit and
loss* account. If the credit exceeds the debit side, then the balancing figure is
termed as net profit, but if the debit side exceeds the credit side, then the
balancing figure is termed as net loss. The process of preparing Balance Sheet is given below

(i) First of all match the total of both the side of trail balance. If there is any
difference in the debit side of trail balance it will be posted in assets side of
balance sheet and if there is any difference in credit side of balance sheet it will
be posted in the liabilities side of the balance sheet.

(ii) Record all the debit balances of real and personal accounts on the left hand
side (i.e., Assets side) of the balance sheet after making all adjustments for
provision and other related items.

(iii) Record all the credit balances of real and personal accounts on the right hand side (i.e., Liabilities side) of the balance sheet after making all adjustments for interest and outstanding items.

(iv) Add Net Profit to the opening capital and deduct Net Loss, if any from the opening capital.

(v) Acertain the total of two sides, which must be equal.

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