Introduction

Financial statements of the sole proprietorship are the statements prepared at the end of the accounting period to determine the financial performance, i.e., profit earned or loss incurred during the accounting period and also the financial position of the business as on the date. They are also known as final accounts. A complete set of Financial statements or Final Accounts include :-

(i) Trading account 
(ii) Profit and Loss account
(iii) Balance sheet

Financial statements are the end product of the accounting process prepared from the Trial Balance.
 
Financial statements are prepared to know :-
1. The profit earned or loss incurred by the business during an accounting period. It is known from the Trading and Profit and Loss Account. 
2. The assets owned and liabilities owed as on the date, financial position by preparing the Balance sheet. 



Objectives Or Need Of Financial Statements

1. Trading and Profit and Loss Account ( Also known as Income Statements) 

  • Determine Gross Profit and Gross Loss 
  • Determine Net Profit and Net Loss
  • Comparison with the previous year's Profits
  • Details of Expenses and Income
  • Reserves 
  • Accounting Ratios 

2.Balance Sheet ( Also known as Position Statements) 

  • Ascertaining Financial Positions
  • Comparison with previous year
  • Determining solvency Position

Users Of Financial Statements

The information in the Financial statements is of interest to a number of internal and external parties. They include: 

Internal Users

  • Owners 
  • Management

External users

  • Employees and Trade Unions
  • Banks and Financial Institutions
  • Creditors
  • Government and its Authorities
  • Researchers
  • Public

Trading Account

Preparation of Trading Account is the first stage of preparing final accounts. It is the financial statements which shows result of buying and selling of goods and /or services during an accounting period. It is credited with revenue from sales of goods and/or services rendered and closing stock or inventory. Opening stock or inventory, net purchases and other direct expenses are debited in the Account. The difference between two sides is either Gross Profit or Gross Loss. 

Profit And Loss Account

Profit and Loss Account is prepared after preparing the Trading Account. It is prepared to determine net profit earned or net loss incurred by the business during an accounting period. 
" A Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice versa".
Accrual basis of accounting is followed in the preparation of this Account. 

Balance Sheet

Balance sheet is the statement prepared after preparing Trading and Profit and Loss Account. Balance sheet is " a statement which sets out the assets and liabilities of a firm or an institution as at a certain date ". In the words of Francis R. Stead," A Balance sheet is a screen picture of the financial position of a going business at a certain moment". It is a statement which reports the assets owned by the enterprise and the claims of the creditors and owners against these assets. Excess of assets over outside liabilities is the capital and is indicative of the financial soundness of the company. It is prepared from Real Accounts and Personal Accounts.