Financial Statements: Balance Sheet and Profit and Loss Notes for SSC
Rahul Kumar
SSC Exam Expert & Content Editor
In this note
- 1.What Are Financial Statements?
- 2.Trading Account
- 3.Profit and Loss Account
- 4.Balance Sheet
- 5.Current and Fixed Assets
- 6.Important Accounting Ratios
- 7.Cash Flow Statement
- 8.Accounting Standards
- 9.Quick Tips
- 10.Quick Revision Points
- 11.Practice Questions With Answers
- 12.How to Practise This Chapter
- 13.Frequently Asked Questions
PDF Notes: Financial Statements: Balance Sheet and Profit and Loss Notes for SSC
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Financial statements are the final reports of a business that show its profit and its financial position at the end of the year. They are an important part of the SSC CGL AAO Finance and Accounts paper. These financial statements notes for SSC explain the trading account, the profit and loss account, the balance sheet, the main ratios and the cash flow statement with solved examples and practice questions.
What Are Financial Statements?
| Statement | Shows | Time |
|---|---|---|
| Trading Account | Gross profit or gross loss | For a period (a year) |
| Profit and Loss Account | Net profit or net loss | For a period (a year) |
| Balance Sheet | Assets, liabilities and capital | On a particular date |
| Cash Flow Statement | Inflow and outflow of cash | For a period (a year) |
Trading Account
- Gross profit = Sales − Cost of goods sold.
- Cost of goods sold = Opening stock + Purchases + Direct expenses − Closing stock.
- If the sales are less than the cost of goods sold, the result is a gross loss.
Example 1. Sales are Rs 5,00,000, opening stock is Rs 50,000, purchases are Rs 3,00,000 and closing stock is Rs 40,000. Find the gross profit.
Cost of goods sold = 50,000 + 3,00,000 − 40,000 = Rs 3,10,000. Gross profit = 5,00,000 − 3,10,000 = Rs 1,90,000.
Profit and Loss Account
- Net profit = Gross profit + Other incomes − Indirect expenses (such as salary, rent and depreciation).
- Net profit is added to the capital in the balance sheet, and net loss is deducted from the capital.
Balance Sheet
| Side | Items |
|---|---|
| Assets (what the business owns) | Fixed assets (land, building, machinery), current assets (cash, bank, debtors, stock), investments |
| Liabilities (what the business owes) | Long-term liabilities (loans), current liabilities (creditors, bills payable, outstanding expenses) |
| Capital (owner's money) | Capital plus profit minus drawings |
The balance sheet always satisfies the equation Assets = Liabilities + Capital. In a company, it is prepared in the vertical form given in Schedule III of the Companies Act, 2013.
Current and Fixed Assets
| Type | Meaning | Examples |
|---|---|---|
| Fixed assets | Used for a long time in the business, not for sale | Building, machinery, furniture |
| Current assets | Converted into cash within a year | Cash, debtors, stock, bills receivable |
| Fictitious assets | Not real assets, but expenses not yet written off | Preliminary expenses |
Important Accounting Ratios
| Ratio | Formula | Ideal value or meaning |
|---|---|---|
| Current ratio | Current assets / Current liabilities | 2 : 1; shows short-term solvency |
| Quick (liquid) ratio | (Current assets − Stock) / Current liabilities | 1 : 1 |
| Gross profit ratio | Gross profit / Net sales × 100 | Shows profit on sales |
| Net profit ratio | Net profit / Net sales × 100 | Shows overall profitability |
| Debt-equity ratio | Debt / Equity | Shows the use of loans |
| Inventory turnover ratio | Cost of goods sold / Average stock | Speed of selling the stock |
| Return on investment (ROI) | Net profit / Capital employed × 100 | Return on the money invested |
Example 2. Current assets are Rs 2,00,000 (including stock of Rs 50,000) and current liabilities are Rs 1,00,000. Find the current ratio and the quick ratio.
Current ratio = 2,00,000 / 1,00,000 = 2 : 1. Quick ratio = (2,00,000 − 50,000) / 1,00,000 = 1.5 : 1.
Example 3. In Example 1, find the gross profit ratio.
1,90,000 / 5,00,000 × 100 = 38 per cent.
Cash Flow Statement
| Activity | Examples |
|---|---|
| Operating activities | Cash from sales, payment to suppliers, salary |
| Investing activities | Purchase or sale of fixed assets and investments |
| Financing activities | Issue of shares, taking or repaying loans, payment of dividend |
Accounting Standards
- In India, the Institute of Chartered Accountants of India (ICAI) issues the accounting standards.
- Companies follow the Indian Accounting Standards (Ind AS), which are converged with the international standards (IFRS).
- The cash flow statement is covered by Ind AS 7.
Quick Tips
- Learn the format of the trading account and the balance sheet, because format-based questions are common.
- Remember the formula of cost of goods sold, because it is used in many numericals.
- Remember the ideal current ratio of 2 : 1 and the quick ratio of 1 : 1.
- Check that assets equal liabilities plus capital in every balance sheet question.
Quick Revision Points
- Gross profit = Sales − Cost of goods sold.
- Net profit = Gross profit + Other incomes − Indirect expenses.
- Balance sheet: Assets = Liabilities + Capital.
- Current ratio = Current assets / Current liabilities.
- Quick ratio excludes stock from current assets.
Practice Questions With Answers
- What does the trading account show?
Answer: Gross profit or gross loss - What does the balance sheet show?
Answer: The financial position of a business on a date - What is the formula of gross profit?
Answer: Sales minus cost of goods sold - What is the ideal current ratio?
Answer: 2 : 1 - What is the ideal quick ratio?
Answer: 1 : 1 - Is stock included in the quick assets?
Answer: No - Opening stock Rs 20,000, purchases Rs 80,000 and closing stock Rs 30,000. Find the cost of goods sold.
Answer: Rs 70,000 - Sales Rs 1,00,000 and cost of goods sold Rs 70,000. Find the gross profit.
Answer: Rs 30,000 - Which statement shows the inflow and outflow of cash?
Answer: Cash flow statement - Which Schedule of the Companies Act, 2013 gives the format of the balance sheet?
Answer: Schedule III
How to Practise This Chapter
Practise one trading account and one balance sheet daily, and solve five ratio questions. Then attempt timed sets from our practice papers and the previous year papers page. Read the previous chapters, Accounting Basics and Inflation, and the next chapter, Public Finance and Fiscal Policy. See all topics on the Finance and Economics notes page.
Frequently Asked Questions
What are financial statements?
Financial statements are the final accounts of a business, which show its profit or loss and its financial position at the end of the year.
What is a trading account?
A trading account shows the gross profit or loss of a business from buying and selling goods.
What is a profit and loss account?
A profit and loss account shows the net profit or net loss after all the expenses and incomes of the year.
What is a balance sheet?
A balance sheet is a statement of the assets and the liabilities of a business on a particular date.
What is the formula of cost of goods sold?
Cost of goods sold equals opening stock plus purchases plus direct expenses minus closing stock.
What is the current ratio?
The current ratio is current assets divided by current liabilities. The ideal value is 2 : 1.
What is the quick ratio?
The quick ratio is current assets minus stock, divided by current liabilities. The ideal value is 1 : 1.
What is the difference between fixed and current assets?
Fixed assets are used for a long time in the business, while current assets are converted into cash within a year.
What is a cash flow statement?
It is a statement that shows the cash received and paid in operating, investing and financing activities.
Who issues accounting standards in India?
The Institute of Chartered Accountants of India (ICAI) issues the accounting standards, and companies follow the Ind AS.
How should I prepare financial statements for the AAO paper?
Learn the formats, practise one set of final accounts daily and revise the ratios and their formulas.
How many questions come from financial statements in SSC exams?
Usually a few questions come from final accounts and ratios, but the number changes with the notification and the year.
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Public Finance and Fiscal Policy Notes for SSC Exams
Rahul Kumar
SSC Exam Expert & Content Editor
Rahul is a senior SSC exam strategist with 8+ years of experience helping aspirants crack CGL, CHSL and MTS exams. He writes in-depth notification breakdowns, exam pattern guides and preparation strategies.