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Financial Statements – I – Class 11 Accountancy notes, important questions and MCQs

NCERT Class 11 Accountancy, chapter 8. Notes, key terms, important questions with answers and MCQs.

Chapter overview

Financial statements are prepared at the end of an accounting period to show the results and financial position of a business. They include the trading and profit and loss account, which shows gross profit and net profit, and the balance sheet, which shows assets, liabilities and capital on a date. A correct distinction between capital and revenue items is essential.

Capital and revenue

Capital expenditure gives benefit for more than one year, such as purchase of machinery; it is shown in the balance sheet.
Revenue expenditure gives benefit within the year, such as wages and rent; it is shown in the trading or profit and loss account.
Deferred revenue expenditure is a large revenue expense whose benefit lasts for a few years, such as heavy advertisement.
Capital receipts (such as capital introduced or loans) and revenue receipts (such as sales and commission) are also distinguished.

Trading and profit and loss account

The trading account shows gross profit: Gross profit = Net sales − Cost of goods sold.
Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock.
The profit and loss account starts with gross profit, deducts indirect expenses (office, selling and distribution) and adds other incomes to find net profit.

Balance sheet

The balance sheet shows assets on one side and capital and liabilities on the other on a particular date.
Assets and liabilities may be arranged in order of liquidity or permanence; this arrangement is called marshalling.
Closing entries transfer nominal accounts to the trading and profit and loss account; opening entries bring forward balances at the start of the next year.

Key terms

Capital expenditure: expenditure whose benefit lasts for more than one accounting year
Revenue expenditure: expenditure whose benefit is used up within the accounting year
Gross profit: the excess of net sales over cost of goods sold
Net profit: the profit left after deducting all expenses from gross profit and adding other incomes
Marshalling: the order in which assets and liabilities are arranged in the balance sheet

Important questions with answers

Distinguish between capital expenditure and revenue expenditure.2 marks

Capital expenditure is incurred to acquire or improve fixed assets and gives benefit for more than one year, such as buying machinery; it is shown in the balance sheet. Revenue expenditure is incurred for day-to-day running of the business and its benefit is used within the year, such as rent and wages; it is shown in the trading or profit and loss account.

What is the importance of the trading account?3 marks

The trading account shows the gross profit or gross loss from buying and selling goods. It helps compare gross profit with sales to find the gross profit ratio, compare direct expenses and stock levels with previous years, and judge whether the selling price and purchase cost are suitable.

Explain the trading account, profit and loss account and balance sheet, and show how gross profit is calculated from: opening stock ₹20,000; purchases ₹1,50,000; wages ₹10,000; closing stock ₹30,000; sales ₹2,00,000.5 marks

Financial statements are prepared at the end of an accounting period. The trading account records purchases, direct expenses, opening and closing stock and sales, and shows gross profit, the difference between net sales and cost of goods sold. The profit and loss account begins with gross profit, deducts indirect expenses such as salaries, rent, advertising, depreciation and interest, adds other incomes such as commission and interest received, and shows net profit or net loss, which is transferred to the capital account. The balance sheet is a statement on a particular date listing assets, such as fixed assets, stock, debtors and cash, against capital and liabilities, such as creditors and loans; assets are arranged in order of liquidity or permanence, known as marshalling. Calculation: Cost of goods sold = Opening stock ₹20,000 + Purchases ₹1,50,000 + Wages ₹10,000 − Closing stock ₹30,000 = ₹1,50,000. Gross profit = Net sales ₹2,00,000 − Cost of goods sold ₹1,50,000 = ₹50,000. This gross profit is carried to the profit and loss account to find net profit.

Quick revision

Capital vs revenue expenditure and receipts.
GP = Net sales − COGS.
COGS = Opening stock + Purchases + Direct expenses − Closing stock.
Balance sheet: assets = capital + liabilities; marshalling.

Exam tips

Learn which expenses are direct (trading account) and which are indirect (profit and loss account).
Practise the cost of goods sold formula with numbers until it is automatic.

Practice MCQs

Purchase of machinery is
1. revenue expenditure
2. capital receipt
3. revenue receipt
4. capital expenditure
Show answer
Answer: (d) capital expenditure. It benefits for many years.
The trading account shows
1. net profit
2. gross profit
3. capital
4. drawings
Show answer
Answer: (b) gross profit. Net profit is in the P&L account.
The balance sheet shows the financial position
1. for a period
2. for one month only
3. for ten years
4. on a particular date
Show answer
Answer: (d) on a particular date. It is a statement, not an account.
Wages paid to factory workers are shown in the
1. trading account
2. profit and loss account
3. balance sheet
4. capital account
Show answer
Answer: (a) trading account. They are a direct expense.
Arranging assets and liabilities in a particular order is called
1. marshalling
2. posting
3. balancing
4. casting
Show answer
Answer: (a) marshalling. It may be by liquidity or permanence.
Heavy advertisement whose benefit lasts for three years is
1. capital expenditure
2. deferred revenue expenditure
3. capital receipt
4. revenue receipt
Show answer
Answer: (b) deferred revenue expenditure. It is written off over the years.
Opening stock ₹20,000; purchases ₹1,50,000; wages ₹10,000; closing stock ₹30,000; sales ₹2,00,000. Gross profit is
1. ₹70,000
2. ₹60,000
3. ₹40,000
4. ₹50,000
Show answer
Answer: (d) ₹50,000. COGS = 1,50,000; GP = 2,00,000 − 1,50,000.
Salaries of office staff are shown in the
1. profit and loss account
2. trading account
3. balance sheet as an asset
4. capital account
Show answer
Answer: (a) profit and loss account. They are an indirect expense.

All chapters of Class 11 Accountancy

Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.