Question

What three financial statements have we created? In what order must we create them? Why must they be created in that order?

Answer 1

The three financial statements that we have created are:

i. Trading account,

ii. Profit and loss account,

iii. Balance sheet

Also, there is a cash flow which need to be prepared.

The order should be:

Step-1- Trading a/c

Step-2- Profit & Loss a/c

Step-3- Balance sheet

They must be created in the given order because:

i. First trading account includes all the income and expenses directly related to the production and we get Gross Profit/Loss which gets transferred to Profit & Loss a/c.

ii. The Gross profit/ Loss is transferred to Profit and loss account which consists of all those expneses and icome which are not directly related to production i.e Office and administrative overheads, Selling and distribution overheads, factory overheads, etc and then net profit/loss is calculated. This net profit/ loss is transferred to Balance sheet and adjusted with Capital account.

ii. Balance sheet is prepared to show all the assets and liabilities of the company.