NCERT Notes Class 11 Accountancy Chapter 8 & 9: Financial Statements

Financial statements, as the word is self-explanatory, are those statements that show a clear picture of profitability (income statement) and financial position (balance sheet) of the business at the end of an accounting period. As we always say that though accountancy or accounts is a practical subject, its theory is equally important to understand. Hence, the theory of Accountancy can not be ignored for a better understanding and working. To understand the concepts and theory related to Financial Statement Class 11, both of which are chapters of Class 11, read this blog till the end so that you are thorough with the concepts. 

What is a Financial Statement?

In Class 11 Accountancy, the concept of financial statements is introduced to explain how a business reports its financial performance and position. A financial statement is essentially a formal record that summarises the financial activities of an organisation. It shows:

• What the business owns and owes on a particular date, and
• How much profit or loss was earned over a specific period

According to accounting principles, financial statements present the results of business operations and the financial status of the firm in a structured and understandable manner.

A complete set of financial statements mainly consists of three parts:

1. Income Statement (or Statement of Profit and Loss) – shows revenue, expenses, and the resulting profit or loss for a given time period.
2. Statement of Financial Position (or Balance Sheet) – presents the assets, liabilities, and owner’s capital of the business on a specific date.
3. Schedules and Notes to Accounts – provide detailed explanations and additional information related to items shown in the Income Statement and Balance Sheet.

Objectives Of Preparing Financial Statements

As per the Financial Statement class 11 chapters, the main objectives to prepare a financial statement at the end of an accounting period are as follows:

• To present a fair and true view of the financial performance of the business, i.e., the profits and the losses at the end of the financial period.
• To present a true and fair view of the financial position of the business, i.e., the assets and the liabilities at the end of the financial period. 
• Management uses them to decide on expansion, cost-cutting, or investments.
• Financial statements make it easy to compare performance year-to-year or with other companies in the same industry.
• Investors and banks rely on these statements to check if the business is worth funding.

Capital Expenditure vs Revenue Expenditure vs Deferred Revenue Expenditure

In Class 11 Financial Statements, it is important to distinguish between capital expenditure, revenue expenditure, and deferred revenue expenditure.

Capital expenditures are costs incurred by a business that provide benefits for more than one year. These are recorded on the assets side of the balance sheet. Examples include purchasing fixed assets, acquiring goodwill, or reducing long-term liabilities.

In contrast, revenue expenditures are recurring expenses that are necessary for the day-to-day operations of a business and help maintain its earning capacity. These are recorded on the debit side of the income statement, including the Trading Account and Profit & Loss Account. Examples include purchases of goods during the year, salaries, wages, postage, and carriage expenses.

Deferred revenue expenditures are expenses that are revenue in nature, but are substantial in amount and provide benefits over several years. Examples include heavy spending on advertising, promotions, or launching a new product or service.

Also Read: CBSE Notes and NCERT Solutions Class 10 Mathematics

Capital Receipts vs Revenue Receipts

Capital receipts refer to funds received by a business that are non-recurring in nature and do not influence the Profit and Loss Account. Instead of affecting the business’s income, they either increase the company’s liabilities (for example, loans raised) or decrease its fixed assets (such as the sale of long-term assets). Therefore, capital receipts appear on the balance sheet, not in the income statement.

In contrast, revenue receipts are amounts received during the normal and routine operations of a business. These include earnings from sales of goods and services, commission received, rent, and similar income sources. Since they arise from day-to-day business activities, revenue receipts are recorded in the Profit and Loss Account and contribute to the business’s overall profit.

Types Of Expenses 

As per the financial statement class 11, expenses can be categorised into 2 categories. These categories are:

• Direct expenses: Direct expenses are costs that are directly associated with the production or purchase of goods. These include expenses required to convert raw materials into finished products. Examples are manufacturing wages, production costs, and similar expenditures. Direct expenses are recorded on the debit side of the Trading Account.
• Indirect expenses: Indirect expenses are costs that are not directly linked to the production or purchase of goods or services. Instead, they relate to administration, office operations, selling and distribution, and financial activities. These expenses are recorded on the debit side of the Profit and Loss Account.

Some Important Formulas 

Mentioned below are some important formulas which are related to financial statements. You can have a look here: 

• Gross Profit Net Sales= Cost of Goods Sold (COGS)
• Net Sales Total Sales= Sales Return 
• Cost of Goods Sold (COGS)= Opening Stock + Net Purchases + Direct Expenses – Closing Stock
• Net Purchases= Total Purchases- Purchases Return 
• Operating Profit=Net sales- Operating Cost
• Operating Profit= Gross Profit- (office and administration expenses + selling and distribution expenses)
• Net Profit= Operating Profit + Non-operating income – Non-operating expenses

Note: Operating Profits are also known as EBIT (Earnings before interest and taxes) 

What are Income Statements?

According to the financial statement class 11 chapters, the income statements are prepared by the organisation or a business to ascertain correct and accurate gross profits or losses and net profits or losses during an accounting period. The income statements are further divided into two accounts or parts:

• Trading Account: The trading account shows the gross profits earned or gross losses incurred by the business during a financial year. 
• Profit and Loss Account: The P/L Account shows the net profits earned or net losses incurred by the business during a financial period. 

Format Of Trading Account 

There is a particular format which is followed in a trading account. It is mentioned in great detail in the Financial Statement class 11 chapters. You can check it out here. 

Trading Account of XYZ Pvt. Ltd.

For the year ending 31st March 2025

Dr.                                                                                                                                              Cr.

Particulars	Amount (INR)	Particulars	Amount (INR)
To opening stock		By sales
To purchases		By closing stock
To wages		By scrap sales
To carriage inward
To Freight inwards
To cartage
To fuel and power
To octroi charges
Tio other direct expenses
To Gross Profit t/f to P/L A/c	xxx	By loss t/f to P/L A/c	xxx

Format Of Trading Account 

Tabulated below is the format of trading accounts related to profit and loss accounts. Have a look here. 

Profit and Loss Account of XYZ Pvt. Ltd.

For the year ending 31st March 2025

Dr.                                                                                                                                               Cr.

Particulars	Amount (INR)	Particulars	Amount (INR)
To gross loss t/f from Trading A/c		By gross profit t/f from Trading A/c
To salaries		By rent received
To rent		By discount received
To printing and stationery		By commission received
To postages and telephones		By interest received
To electricity bill		By dividend received
To insurance premium		By bad debts recovered
To legal expenses		By gain on sale of fixed assets
To establishment expenses		By miscellaneous receipts
To trade expenses		By Net Loss t/f to Capital A/c (if Dr. > Cr. side)
To audit fee
To travelling expenses
To general expenses
To carriage and freight outwards
To commission
To brokerage
To advertisement
To bad debts
To export duty
To export duty
To packing expenses
To interest paid
To discounts given
To bank charges
To repairs
To depreciation on fixed assets
To conveyance expenses
To donations and charity
To loss on sale of fixed assets
To entertainment expenses
To loss by fire
To loss by theft
To other miscellaneous expenses
To Net Profit t/f to Capital A/c (if Cr. > Dr. side)

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What is a Balance Sheet?

According to the financial statement class 11 chapters, a balance sheet is a summarised statement of assets and liabilities that is prepared at the end of the financial year. It is made to show the financial position of the business or the organisation. All the assets are placed on the right side of the balance sheet, and all the liabilities at the left side. Please remember these points:

• The assets are arranged in order of liquidity in the balance sheet. This means that the most liquid asset, such as cash in hand, is shown first and the least liquid assets, such as the goodwill, are shown last. 
• The liabilities are arranged in the order of timing. This means that the liabilities which are to be paid immediately or at first are shown first, such as the creditors and the liabilities which are to be paid later are shown last, such as long-term loans. 

Format of the Balance Sheet 

Moving further in the financial statement chapters, class 11 chapters, we have the format of the balance sheet. It is tabulated below. 

Balance Sheet of XYZ Pvt. Ltd.

As at 31st March 2025

Liabilities	Amount (INR)	Assets	Amount (INR)
Bank overdraft		Cash in hand
Bills payable		Cash at bank
Sundry creditors		Bills receivable
Outstanding expenses		Short-term investment
Income received in advance		Sundry debtors
Long-term loans		Prepaid expenses
Capital		Accrued income
Add: Interest on capital		Closing stock
Add: net profit		Furniture and Fixtures
Less: drawings		Plant and Machinery
Less: net loss		Building
Less: income tax		Land
		Goodwill

Important Adjustments At A Glance 

The Financial Statements – I chapter in Class 11 focuses mainly on the theoretical aspects of financial statements. It explains the basic purpose and use of income statements and balance sheets (position statements) in a business or organisation. On the other hand, Financial Statements – II in Class 11 deals with the practical side of financial statements. This chapter highlights the important adjustments and their application in solving numerical problems, helping students learn how financial statements are prepared in real business situations.

To make learning simpler and avoid confusion, the revision notes for Financial Statements – I and Financial Statements – II of Class 11 have been combined. The table provided below offers a comprehensive summary of the important adjustments, adjustment entries, and their treatment in the Trading Account, Profit and Loss Account, and Balance Sheet. It serves as an excellent tool for quick revision, especially before exams.

Adjustment	Adjustment entry	Treatment in the Trading A/c	Treatment in the Profit and Loss A/c	Treatment in Balance Sheet
Closing stock	Closing stock A/c……Dr.To Trading A/c	Shown on the credit side		Shown on the assets side
Outstanding expenses	Expenses A/c………..Dr.To O/s Expenses A/c	Shown on the debit side	Shown on the debit side	Shown on the liabilities side
Prepaid or unexpired expenses	Prepaid expenses A/cTo Expenses A/c	Deducted from respective expenses on the debit side	Deducted from respective expenses on the debit side	Shown on the assets side
Depreciation	Depreciation A/c…….Dr.To assets A/c		Shown on the debit side	Deducted from the asset on the asset side
Accrued Income	Accrued income A/c…Dr.To income A/c		Added to the respective income on the credit side	Shown on the assets side
Unearned income	Income A/c……………Dr.To unearned income A/c		Deducted from the respective income on the credit side	Shown on the liabilities side
Interest on capital	Interest on Capital A/cTo capital A/c		Shown on the debit side	Added to the capital on the liabilities side
Interest on drawings	Interest on Drawings A/cTo drawings A/c		Shown on the debit side	Added to drawings and then deducted from the Capital on the liabilities side
Interest on loan	Interest on loan A/c…Dr.To loan A/c		Shown on the debit side	Added to the loan on the liabilities side
Further bad debts	Bad debts A/c……….Dr.To sundry debtors A/c		Added to bad debts on the debit side	Deducted from debtors on the assets side
Provision for doubtful debts	Profit & Loss A/c…….Dr.To provision for doubtful debts A/c		Added to bed debts on the debit side	Deducted from debtors on the asset side
Provision for discount on debtors	Profit & Loss A/c…….Dr.To provision for discount on debtors A/c		Shown on the debit side	Deducted from debtors on the asset side
Abnormal loss of stock	Insurance Co. A/c……Dr.Profit & Loss A/c…….Dr. To purchases A/c	Total amount of loss will be deducted from the purchases on the debit side	Amount recovered from the insurance company is shown on the debit side	Amount recovered from the insurance company is shown on the asset side
Charity in the form of goods	Insurance Co. A/c……Dr.Profit & Loss A/c…….Dr. To purchase A/c	Deducted from purchases on the debit side	Shown on the debit side
Goods distributed as free samples	Charity A/c……………Dr.To purchase A/c	Deducted from purchases on the debit side	Shown on the debit side
Drawings in goods	Free samples A/c……Dr.To purchase A/c	Deducted from purchases on the debit side		Deducted from the capital on the liabilities side
Manager’s commission	Manager’s commission A/cTo o/s commission A/c		Shown on the debit side	Shown on the liabilities side
Goods sold but omitted to be recorded	Debtors A/c…….…….Dr.To sales A/c	Added to the sales on the credit side		Added to the debtors on the assets side
Goods purchased but omitted to be recorded	Purchases A/c……….Dr.To creditors A/c	Added to purchases on the debit side		Added to creditors on the liabilities side

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This brings us to the end of this blog on the financial statement class 11 study and revision notes. Even though both chapters are lengthy, notes help us memorise the important parts. Are you worried about selecting the right stream after class 12th? If you are looking for a career that perfectly suits you, get in touch with our Leverage Edu experts and sign up for a free session today!