Question

Long Answer Question

Explain the process of preparing income statement and balance sheet.

Answer 1

The process of preparing Income Statement (now Statement of Profit and Loss) as per Revised Schedule VI is explained below in a chronological order.

1. Prepare a Trial Balance on the basis of the balances of various accounts in the ledger.

2. Record Revenue from Operations i.e. Sales less Sales Return. 

3. Add Other Incomes to Revenue from Operations (such as profit on sale of assets, cash discount received etc.) to ascertain Total Revenue.

4. Deduct all the expenses incurred by the company from Total Revenue (such as cost of material consumed, finance cost, depreciation and amortisation etc.) to ascertain Profit before Tax.

5. Deduct Tax paid by the company from Profit before Tax to ascertain the Profit or loss for the period.

The process of preparing Balance Sheet as per the Revised Schedule VI is explained below in a chronological order.
As per the this schedule, the Balance Sheet is prepared in vertical format and divided into two parts i.e. (i) Equity and Liabilities and (ii) Assets

1. Under the head Equity and Liabilities: Shareholders' Funds, Share Application Money Pending Allotment, Non-Current Liabilities and Current Liabilities are recorded.

2. After recording Equity and Liabilities, Assets are recorded. Under this head all the Non-Current Assets (such as Tangible and Intangible Assets, Capital Work-in-Progress etc.) and Current Assets (such as Inventories, Trade Receivables, Current Investment etc.) are recorded.

3. At the end, total of two heads is ascertained, which must be equal.