Financial Statements are prepared following the constituent accounting concepts principles procedures and also the legal environment in which the business organisationoperate. These statements are the source of information on the basis of which conclusions are drawn about the profitability and financial position of a
company so that their users can easily understand and use them in their economic decisions in a meaningful way.
From the above statements identify any two values that a company should observe while preparing its financial statements. Also, State under which major headings and sub-headings the following items will be presented in the Balance Sheet of a company as per Schedule III of the Companies Act 2013.
(i) Capital Reserve
(ii) Calls-in-Advance
(iii) Loose Tools
(iv) Bank Overdraft
The values that must be observed by a company while preparing its financial statements are
(a) these statements must be drawn following the defined accounting concepts, principles and methods, and
(b) the financial statements should be drawn following the legal framework of the country of operations.
Proprietary Ratio of M Ltd. 0.80 : 1
| Transactions | Effects |
| (a) Obtained a loan from bank Rs 2,00,000 Payable after 5 years | Decrease, The total assets would increase with the amount of loan raised and proprietor's fund remains the same |
| (b) Purchased machinery for cash Rs 75,000 | No Change, Total Assets will increase and decrease by same amount |
| (c) Redeemed 5% Redeemable preference shares Rs 1,00,000 | Decrease, Proprietor's Funds and Total Assets both will decrease by same amount but the percentage change would be more in Proprietor's Fund already in ratio 0.80 : 1 |
| (d) Issued equity shares to vendors of machinery purchased of Rs. 4,00,000 | Increase, Even though both Proprietor’s Funds and Total Assets both will increase by same amount but the percentage change would be more in Proprietor's Fund |
