Question

List and describe the benefits and application of the methods for presenting and formatting financial data.

Answer 1

Following are the list and application of the methods for presenting and formatting financial data :

1.  In case of sole proprietary and partnership concerns as such there are no prescribed formats. In this case the conventional method of presentation is ‘T’ format or horizontal format.

2. In case of companies, the Companies Act, 1956 has given prescribed forms for the presenatation of Profit and Loss Account and Balance Sheet in Part I Schedule VI which is in horizontal format only. But in recent times they are presented in vertical form i.e., in a single column form. The modern practice is to draw up financial statements in vertical summary form and to give details as required by law in separate schedules. Each schedule is being distinctly numbered giving reference to the schedule in the main financial statements.

Application for Vertical form of Balance sheet and Income statement is as mentioned below:

A. Details under each item in Balance sheet shall be given in separate schedules. The schedule shall incorporate all the information given under Part I A of Schedule VI read with notes containing general instructions for preparation of Balance Sheet.

B. The Schedules, accounting policies and explanatory notes that may be attached shall form an integral part of the balance sheet.

C. The figures in the balance sheet may be rounded to the nearest “000” or “00” as may be convenient or may be expressed in terms of decimals of thousands.

D. A footnote to the balance sheet may be added to show separately contingent liabilities.

Part II of Schedule VI states the particulars and information to be given in the Profit and Loss account.

Application for Horizontal form of Balance sheet and Income statement is as mentioned below:

A horizontal balance sheet presents the assets on the left side of the paper or page and the liabilities and owner's equity on the right. Because the sections are shown side by side, a horizontal balance sheet allows companies to easily compare long-term assets to long-term liabilities and short-term assets to short-term liabilities.

Income Statement:

The format of the Income Statement or Profit and Loss Account is same as that of sole proprietary or partnership concerns and usually prepared in “T” shape. However, in the case of Companies the Manufacturing, Trading and Profit and Loss Account is prepared in horizontal form except with three modifications.

(a) The heading given is only “Profit and Loss Account” in the place of Manufacturing, Trading and Profit and Loss account.

(b) The Net Profit is shown after making provision for taxation in the Profit and Loss Account and taken to Profit and Loss Appropriation Account.

(c) Figures relating to previous period are also given.

Profit and Loss Appropriation Account:

The companies prepare a separate P&L Appropriation A/c in order to explain how the profits earned during the period has been distributed. This statement is also called as the Statement of Retained Earnings.

Benefits of the methods for presenting and formatting financial data:

1. The vertical form enables one to grasp the essential message very quickly.

2. It helps in understanding the financial status of the company.

3. Shareholders and lendors can invest / provide funds based on good financial health of the company.

4. It helps prepare a budget and make financial decisions accodingly.

5. It is useful to the management as a good tool to understand the funds movement in the organisation very easily.

6. It is useful to forecast funds flow. It can also be used to know the working capital requirements. It provides reasonable time to ascertain future funds requirements and make suitable arrangements to get the same.