Financial Statements: Financial statements tell us what a business owns, owes, earns, and spends

A Financial Statement is a report that shows the financial condition and performance of a business.

Main 3 Financial Statements:

1. Balance Sheet → Shows Assets, Liabilities, and Capital at a specific date.
2. Profit & Loss Account (P&L) → Shows Profit or Loss during a period.
3. Cash Flow Statement → Shows Cash Inflow and Outflow.

Balance Sheet:

A Balance Sheet is a financial statement that shows the financial position of a business on a particular date.

Balance Sheet is a statement showing the financial position of a business on a particular date. It contains assets, liabilities and capital. It is prepared to know the financial health, liquidity and solvency of the business. It is based on the accounting equation: Assets = Liabilities + Capital.

It tells us:

• What the business owns → Assets
• What the business owes → Liabilities
• What belongs to the owner → Capital / Equity

It is called a Balance Sheet because both sides must always be equal:

Assets = Liabilities + Capital

1) Meaning of Balance Sheet

A Balance Sheet is a statement of assets and liabilities prepared at the end of an accounting period (like 31 March).

It helps us understand:

• the strength of the business
• the solvency of the business
• the liquidity position
• the amount of owner’s fund
• the amount of borrowed fund

In short, it is a snapshot of the business’s financial health.

2) Definition

“Balance Sheet is a statement showing the assets, liabilities and capital of a business on a particular date.”

3) Main Parts of a Balance Sheet

A Balance Sheet has two sides:

(A) Liabilities Side

This side shows:

• Capital
• Loans
• Creditors
• Other obligations

It tells from where the money has come.

(B) Assets Side

This side shows:

• Cash
• Bank balance
• Furniture
• Building
• Stock
• Debtors
• etc.

It tells where the money has been used.

4) Format of Balance Sheet

Simple Format

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital	1,00,000	Cash	20,000
Bank Loan	50,000	Bank	30,000
Creditors	25,000	Stock	40,000
Outstanding Expenses	5,000	Debtors	35,000
		Furniture	25,000
Total	1,80,000	Total	1,80,000

This is a basic balance sheet.

5) Components of Balance Sheet in Detail

A. ASSETS

Assets are the properties or resources owned by the business.

Definition:

Assets are economic resources that provide future benefit to the business.

Assets are mainly of two types:

(i) Current Assets

These are assets that can be converted into cash within one year.

Examples:

• Cash in hand
• Cash at bank
• Stock
• Debtors
• Bills Receivable
• Short-term investments
• Prepaid expenses

Meaning of important current assets:

• Cash in hand → money physically available
• Cash at bank → money deposited in bank
• Stock → unsold goods
• Debtors → customers who owe money to the business
• Bills Receivable → written promises from customers to pay later
• Prepaid Expenses → expenses paid in advance

(ii) Non-Current / Fixed Assets

These are assets used in business for a long period and not meant for immediate sale.

Non-current Asset vs Fixed Asset

These two terms are related, but they are not exactly the same.

1) Non-current Asset

A non-current asset is an asset that a business keeps or uses for more than one year.

These assets are not meant for immediate sale and are generally used for the long term.

Examples:

• Land
• Building
• Machinery
• Furniture
• Long-term investments
• Patent
• Trademark
• Goodwill

Meaning:

Non-current assets represent the long-term resources of a business.

2) Fixed Asset

A fixed asset is a long-term tangible asset that a business uses in its day-to-day operations to generate income.

These are assets used in running the business, not for resale.

Examples:

• Plant and machinery
• Building
• Furniture
• Vehicles
• Computers
• Office equipment

Meaning:

Fixed assets are used for production, administration, or business operations.

Main Difference

All fixed assets are non-current assets

but

Not all non-current assets are fixed assets

Easy Example

Suppose a company owns:

• Machinery → Fixed Asset and Non-current Asset
• Patent → Non-current Asset, but not Fixed Asset
• Long-term Investment → Non-current Asset, but not Fixed Asset

Comparison Table

Basis	Non-current Asset	Fixed Asset
Meaning	Asset held for more than one year	Long-term asset used in business operations
Scope	Wider category	Narrower category
Nature	Can be tangible or intangible	Usually tangible
Includes	Fixed assets, intangible assets, long-term investments	Machinery, furniture, building, vehicles
Purpose	Long-term benefit	Used in business operations

In Simple Words

Non-current Assets = All long-term assets

Fixed Assets = Long-term assets used in operations

Examples:

• Land
• Building
• Plant & Machinery
• Furniture
• Vehicles
• Computers
• Goodwill

Features:

• Used for earning income
• Long-term in nature
• Not converted into cash quickly

B. LIABILITIES

Liabilities are the debts or obligations of the business.

Definition:

Liabilities are amounts payable by the business to outsiders.

They are also of two types:

(i) Current Liabilities

These are liabilities payable within one year.

Examples:

• Creditors
• Bills Payable
• Bank Overdraft
• Outstanding Expenses
• Short-term loans

Meaning:

• Creditors → suppliers to whom money is due
• Bills Payable → written promises made by the business to pay
• Outstanding Expenses → expenses due but not yet paid
• Bank Overdraft → excess amount withdrawn from bank

(ii) Long-Term Liabilities / Non-Current Liabilities

These are payable after one year. A Long-Term Liability / Non-Current Liability is a debt or obligation that a company has to pay after more than 12 months from the balance sheet date.

In One Line:

Long-Term Liabilities = Non-Current Liabilities = Debts payable after 1 year

Examples:

• Bank Loan
• Debentures
• Long-term borrowings
• Mortgage loan

Features:

• Long repayment period
• Used for expansion or fixed assets purchase

C. CAPITAL / OWNER’S EQUITY

Capital means the owner’s claim on the business.

Formula:

Capital = Assets – Liabilities

It is the amount invested by the owner plus profit retained in the business.

Examples:

• Owner’s capital
• Reserves and surplus
• Retained earnings

Important Point:

Although capital appears on the liabilities side, it is not an outside liability.
It is the owner’s claim against the business.

This is because, in accounting, business and owner are treated separately.

6) Accounting Equation and Balance Sheet

The Balance Sheet is based on the Accounting Equation:

Assets = Liabilities + Capital

This equation must always remain equal.

Example:

Suppose:

• Assets = ₹5,00,000
• Liabilities = ₹2,00,000

Then:

• Capital = ₹3,00,000

So:

₹5,00,000 = ₹2,00,000 + ₹3,00,000

This is why the balance sheet “balances”.

7) Why is it Called “Balance” Sheet?

Because both sides are always equal:

• Liabilities side = Sources of funds
• Assets side = Uses of funds

So if total money introduced is ₹10 lakh, it must be used somewhere.

That is why the total must match.

8) Importance / Advantages of Balance Sheet

A Balance Sheet is very important for owners, investors, banks, and management.

Importance:

(1) Shows Financial Position

It tells whether the business is financially strong or weak.

(2) Shows Solvency

It helps us know whether the business can pay its long-term debts.

(3) Shows Liquidity

It helps us know whether the business can pay short-term liabilities.

(4) Helps in Taking Loans

Banks check the balance sheet before giving loans.

(5) Useful for Investors

Investors use it to judge the safety of investment.

(6) Helps in Financial Analysis

It is used to calculate:

• Current Ratio
• Debt-Equity Ratio
• Working Capital
• Return on Capital Employed

(7) Shows Owner’s Net Worth

It helps determine the actual worth of the owner’s stake.

9) Limitations of Balance Sheet

Although very useful, balance sheet has some limitations.

Limitations:

(1) It Shows Position on One Date Only

It is just a snapshot, not the whole story.

(2) Based on Historical Cost

Many assets are shown at old purchase price, not current market value.

(3) Intangible Strength is Not Fully Shown

Brand value, employee quality, customer trust may not appear properly.

(4) Can Be Affected by Accounting Policies

Different methods of depreciation or valuation may change figures.

(5) Does Not Show Profitability Fully

For profit, we need Profit & Loss Account also.

10) Difference Between Trial Balance and Balance Sheet

Basis	Trial Balance	Balance Sheet
Meaning	Statement of ledger balances	Statement of assets and liabilities
Purpose	To check arithmetic accuracy	To show financial position
Prepared From	Ledger accounts	Final accounts
Includes	All balances	Only assets, liabilities, capital
Nature	Internal statement	Financial statement

11) Difference Between Balance Sheet and Trading / P&L Account

Basis	Balance Sheet	Trading / P&L Account
Shows	Financial position	Profit or loss
Nature	Position statement	Performance statement
Period	On a particular date	For a period
Includes	Assets, liabilities, capital	Expenses, incomes, gross profit, net profit

12) Example of Balance Sheet with Explanation

Let us take a simple example.

Example:

Mr. Ravi has the following:

Liabilities:

• Capital = ₹2,00,000
• Bank Loan = ₹1,00,000
• Creditors = ₹50,000

Assets:

• Cash = ₹40,000
• Bank = ₹60,000
• Stock = ₹70,000
• Debtors = ₹50,000
• Furniture = ₹80,000
• Machinery = ₹1,50,000

Now prepare the Balance Sheet.

Balance Sheet of Mr. Ashutosh

as on 31 March 20XX

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital	2,00,000	Cash	40,000
Bank Loan	1,00,000	Bank	60,000
Creditors	50,000	Stock	70,000
		Debtors	50,000
		Furniture	80,000
		Machinery	1,50,000
Total	3,50,000	Total	4,50,000

This is not balanced, so one figure is missing or wrong.

Let’s correct it.

If liabilities total is ₹3,50,000, then assets must also be ₹3,50,000.

Suppose Machinery is ₹50,000 instead of ₹1,50,000.

Then:

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital	2,00,000	Cash	40,000
Bank Loan	1,00,000	Bank	60,000
Creditors	50,000	Stock	70,000
		Debtors	50,000
		Furniture	80,000
		Machinery	50,000
Total	3,50,000	Total	3,50,000

Now it is correct.

13) Important Terms Used in Balance Sheet

(1) Net Worth

Net worth means owner’s total stake.

Formula:

Net Worth = Capital + Reserves – Losses

(2) Working Capital

Working capital means excess of current assets over current liabilities.

Formula:

Working Capital = Current Assets – Current Liabilities

Example:

If:

• Current Assets = ₹1,20,000
• Current Liabilities = ₹70,000

Then:
Working Capital = ₹50,000

(3) Current Ratio

It shows short-term financial strength.

Formula:

Current Ratio = Current Assets / Current Liabilities

Example:
If CA = ₹2,00,000 and CL = ₹1,00,000

Then:
Current Ratio = 2 : 1

(4) Debt-Equity Ratio

It shows the relationship between borrowed funds and owner’s funds.

Formula:

Debt-Equity Ratio = Outside Liabilities / Shareholders’ Funds

This ratio is very useful in analysis.

14) Balance Sheet in Company Form (Brief Idea)

In companies, the balance sheet is shown in a more formal way.

Main heads are:

Equity and Liabilities

• Share Capital
• Reserves and Surplus
• Non-current Liabilities
• Current Liabilities

Assets

• Non-current Assets
• Current Assets

This is prepared according to accounting standards and company law format.

15) Final Conclusion

A Balance Sheet is one of the most important financial statements of any business. It tells us what the business owns, what it owes, and what remains for the owner. It is very useful for owners, investors, banks, creditors, and management. Though it has some limitations, it remains a basic and powerful tool of financial analysis.

M/s DomainsTrug Ground  Floor, Building of India, Finance Street New Delhi-100001 BALANCE SHEET AS ON 31st MARCH 2024
EQUITY AND LIABILITIES				(Rs. in Lac)	ASSETS				(Rs. in Lac)
1. SHAREHOLDER’S FUNDS					1. FIXED ASSET
A. Share Capital				₹ 4.00	A. FURNITURE AND FIXTURE				₹ 3.00
B. Reserve & Surplus				₹ 2.00	B. EQUIPMENT				₹ 1.00
				₹ 6.00					₹ 4.00
2. NON-CURRENT LIABILITES					2. NON CURRENT ASSETS
A. LONG TERM BORROWINGS				₹ 0.60	A. NON CURRENT INVESTMENT (MF)				₹ 1.00
B. UNSECURED LOAN FROM FRIENDS				₹ 1.40
				₹ 2.00					₹ 1.00
3. CURRENT LIABILITY					3. CURRENT ASSETS
A.  SHORT TERM BORROWING/CC				₹ 2.00	A. INVENTORY/STOCK				₹ 2.00
B. TRADE PAYABLE/ CREDITORS				₹ 1.00	B. TRADE RECEIVABLE/ DEBTOR				₹ 3.00
C. OTHER CURRENT LIABILIYTY				₹ 0.00	C. CASH AND BANK BALANCE				₹ 1.00
D. SHORT TERM PROVISION				₹ 0.00	D. SHORT TERM ADVANCE				₹ 0.00
				₹ 3.00					₹ 6.00
TOTAL				₹ 11.00	TOTAL				₹ 11.00
For M/s DomainsTrug
	Proprietor
Date:	17.04.24
Place:	Delhi
CURRENT ASSET		₹ 6.00		Minimum Margin for Method 1				₹ 1.25
CURRENT LIABILITY		₹ 3.00		Minimum Margin for Method 2				₹ 1.50
ATNW		₹ 6.40		Actual Margin				₹ 3.00
TOL		₹ 4.60
TOL/ATNW		0.72		MPBF				₹ 2.00
CURRENT RATIO		2
NCA		₹ 3.00
WCG		₹ 5.00
TTL/ATNW		₹ 1.03

Profit & Loss Account (P&L):

A Profit & Loss Account (P&L), also called the Income Statement, shows whether a business made profit or loss during a specific period.

While the Balance Sheet shows financial position on one date, the P&L shows financial performance over a period (for example, 1 April to 31 March).

Profit and Loss Account is a financial statement prepared to ascertain the net profit or net loss of a business for a particular period. It records indirect expenses and indirect incomes. If income exceeds expenses, there is net profit; if expenses exceed income, there is net loss.

1) Meaning of P&L

A Profit & Loss Account records:

• Income / Revenue earned
• Expenses incurred
• and finally tells us:
  • Net Profit, or
  • Net Loss

Basic Formula:

Net Profit = Total Income – Total Expenses

If expenses are more than income:

Net Loss = Total Expenses – Total Income

2) Definition

“Profit and Loss Account is a financial statement prepared to ascertain the net profit or net loss of a business for a particular accounting period.”

3) Purpose of P&L Account

The main purpose of P&L is to know:

• whether the business is earning profit
• whether expenses are under control
• how efficiently the business is operating
• how much net income remains after all expenses

It helps owners, investors, managers, and banks judge the business’s performance.

4) Difference Between Trading Account and P&L Account

Before understanding P&L fully, one important thing:

In traditional accounting:

• Trading Account finds Gross Profit / Gross Loss
• Profit & Loss Account finds Net Profit / Net Loss

Flow:

Sales – Cost of Goods Sold = Gross Profit

Gross Profit – Operating & Other Expenses + Other Income = Net Profit

So P&L usually starts after Trading Account.

5) Main Items of P&L Account

A P&L Account has two sides:

(A) Debit Side (Expenses and Losses)

This side records all indirect expenses and losses.

(B) Credit Side (Incomes and Gains)

This side records indirect incomes and gains.

At the end:

• If credit side > debit side → Net Profit
• If debit side > credit side → Net Loss

6) Expenses Shown in P&L Account

These are usually indirect expenses.

Common examples:

• Salary
• Rent
• Office Expenses
• Electricity
• Printing & Stationery
• Insurance
• Advertisement
• Depreciation
• Bad Debts
• Discount Allowed
• Legal Charges
• Audit Fees
• Telephone Expenses
• Carriage Outward
• Repairs
• Interest on Loan
• Commission Paid

These are expenses incurred to run the business.

7) Incomes Shown in P&L Account

These are indirect incomes or gains.

Common examples:

• Commission Received
• Discount Received
• Rent Received
• Interest Received
• Dividend Received
• Profit on Sale of Asset
• Miscellaneous Income

Also, Gross Profit from Trading Account is transferred to the credit side of P&L.

8) Format of P&L Account

Simple Format

Profit & Loss Account

for the year ended 31 March 20XX

Dr. (Expenses & Losses)	Amount (₹)	Cr. (Incomes & Gains)	Amount (₹)
Salary	25,000	Gross Profit b/d	80,000
Rent	15,000	Commission Received	10,000
Advertisement	10,000	Discount Received	5,000
Electricity	8,000
Depreciation	7,000
Insurance	5,000
Net Profit transferred to Capital A/c	25,000
Total	95,000	Total	95,000

This means the business earned a Net Profit of ₹25,000.

9) How P&L is Prepared

The steps are simple:

Step 1: Find Gross Profit / Gross Loss

This is found from Trading Account.

Step 2: Record all indirect expenses

Put them on the debit side.

Step 3: Record all indirect incomes

Put them on the credit side.

Step 4: Compare both sides

• If income > expenses → Net Profit
• If expenses > income → Net Loss

10) Gross Profit vs Net Profit

This is one of the most important concepts.

(A) Gross Profit

Gross Profit is profit from buying and selling goods only.

Formula:

Gross Profit = Net Sales – Cost of Goods Sold

It shows basic trading efficiency.

(B) Net Profit

Net Profit is the final profit after deducting all indirect expenses and adding other incomes.

Formula:

Net Profit = Gross Profit + Other Income – Indirect Expenses

It shows overall business performance.

11) Example of P&L Account

Let us take a simple example.

Suppose a business has:

Gross Profit = ₹1,20,000

Expenses:

• Salary = ₹20,000
• Rent = ₹15,000
• Electricity = ₹5,000
• Advertisement = ₹10,000
• Insurance = ₹5,000
• Depreciation = ₹10,000

Incomes:

• Commission Received = ₹8,000
• Discount Received = ₹2,000

Preparation:

Total Expenses:

20,000 + 15,000 + 5,000 + 10,000 + 5,000 + 10,000 = ₹65,000

Total Income:

1,20,000 + 8,000 + 2,000 = ₹1,30,000

Net Profit:

₹1,30,000 – ₹65,000 = ₹65,000

P&L Account

Dr. (Expenses & Losses)	Amount (₹)	Cr. (Incomes & Gains)	Amount (₹)
Salary	20,000	Gross Profit b/d	1,20,000
Rent	15,000	Commission Received	8,000
Electricity	5,000	Discount Received	2,000
Advertisement	10,000
Insurance	5,000
Depreciation	10,000
Net Profit c/d	65,000
Total	1,30,000	Total	1,30,000

So the business made a Net Profit of ₹65,000.

12) What Happens to Net Profit?

After finding profit, it is transferred to the Capital Account.

If there is profit:

It increases owner’s capital.

If there is loss:

It reduces owner’s capital.

This is why P&L and Balance Sheet are connected.

13) Relationship Between P&L and Balance Sheet

This is very important.

P&L shows:

How much profit or loss the business earned

Balance Sheet shows:

What the business owns and owes

Connection:

• Net Profit from P&L is added to Capital in Balance Sheet
• Net Loss is deducted from Capital

So:

Closing Capital = Opening Capital + Profit – Drawings + Additional Capital

This is how both statements are linked.

14) Importance / Advantages of P&L Account

The P&L Account is very important because it helps in judging performance.

Importance:

(1) Measures Profitability

It shows whether the business is profitable or not.

(2) Helps in Cost Control

It shows where expenses are high.

(3) Helps in Decision Making

Management can take better business decisions.

(4) Useful for Investors and Banks

They judge whether the business is performing well.

(5) Helps in Comparison

It can be compared with previous years.

(6) Helps in Tax Planning

Profit figures are used for taxation purposes.

15) Limitations of P&L Account

Although useful, it has some limitations.

Limitations:

(1) Based on Accounting Estimates

Depreciation, bad debts, provisions etc. are estimates.

(2) Can Be Affected by Accounting Policies

Different methods may change profit figures.

(3) Does Not Show Cash Position

A business may show profit but still have low cash.

(4) Ignores Some Non-Financial Factors

Customer satisfaction, employee quality, brand image are not shown.

(5) Profit Alone Does Not Show Full Strength

A business may have profit but weak balance sheet.

That is why P&L should be read together with:

• Balance Sheet
• Cash Flow Statement

16) Difference Between P&L and Balance Sheet

Basis	P&L Account	Balance Sheet
Purpose	To find profit or loss	To show financial position
Period	For a period	On a particular date
Nature	Performance statement	Position statement
Includes	Income and expenses	Assets, liabilities, capital
Result	Net profit / net loss	Financial position

17) Difference Between Cash Flow and P&L

Basis	P&L Account	Cash Flow Statement
Shows	Profitability	Cash movement
Includes	Income & expenses	Cash inflows & outflows
Non-cash items	Included	Not included as cash
Example	Depreciation affects P&L	Depreciation does not reduce cash

Important:

A company may show:

• profit in P&L
  but
• cash shortage in reality

This is why cash flow is also important.

18) Key Terms in P&L

(1) Revenue / Sales

Money earned from selling goods or services.

(2) Expense

Cost incurred to earn income.

(3) Gross Profit

Profit before indirect expenses.

(4) Net Profit

Final profit after all expenses.

(5) Operating Profit

Profit from core business operations only.

(6) Non-Operating Income

Income not directly from main business.

Example:

• interest received
• rent received
• profit on sale of machine

19) Modern Form of P&L (Company Format)

In modern accounting, P&L is often presented in statement form like this:

Statement of Profit & Loss

• Revenue from Operations
• Other Income
• Total Income
• Cost of Materials / Purchases
• Employee Benefits Expense
• Finance Cost
• Depreciation
• Other Expenses
• Profit Before Tax (PBT)
• Tax Expense
• Profit After Tax (PAT)

This is common in companies and corporate annual reports.

20) Real-Life Understanding

Imagine you run a shop.

During the year:

• You earned: ₹10,00,000
• You spent on rent, salary, electricity, transport, etc.: ₹7,50,000

Then:

Profit = ₹2,50,000

This ₹2,50,000 is shown in P&L.

Now if you use that profit to increase your business funds, it will appear in Balance Sheet as part of capital.

So:

• P&L answers: “Did I earn?”
• Balance Sheet answers: “What do I own and owe now?”

21) Final Conclusion

A Profit & Loss Account is one of the most important financial statements because it tells whether a business is making money or losing money. It helps in evaluating profitability, controlling expenses, comparing performance, and making business decisions. However, it should always be studied together with the Balance Sheet and Cash Flow Statement for complete financial understanding.

Easiest One-Line Difference:

• Balance Sheet = Business ki position
• P&L Account = Business ki performance

Cash Flow

Cash Flow means the movement of cash and cash equivalents into and out of a business during a specific period.

Cash Flow Statement is a financial statement that shows the movement of cash and cash equivalents during a period. It is divided into three parts: operating activities, investing activities and financing activities. It helps in understanding liquidity, financial flexibility and actual cash position of the business. It is different from Profit & Loss Account because it records only actual cash movement, not credit transactions.

In very simple words:

Cash Flow tells us how money came into the business and how money went out.

It helps answer one practical question:

“Does the business actually have cash?”

Because a business can show profit in P&L and still have cash shortage.

That is why Cash Flow is extremely important.

1) Meaning of Cash Flow

Cash Flow refers to:

• Cash received → called Cash Inflow
• Cash paid → called Cash Outflow

So:

Cash Flow = Cash Inflows – Cash Outflows

If inflow is more than outflow → cash increases
If outflow is more than inflow → cash decreases

2) Definition

“Cash Flow is the movement of cash and cash equivalents in and out of a business during an accounting period.”

Or:

“Cash Flow Statement is a statement showing inflow and outflow of cash from operating, investing and financing activities during a period.”

3) What is Cash Flow Statement?

A Cash Flow Statement is a financial statement that shows:

• how cash was generated
• how cash was used
• why cash balance increased or decreased

It is generally prepared for a period like:

• monthly
• quarterly
• yearly

4) Why Cash Flow is Important

A business survives not just on profit, but on cash.

Because cash is needed to:

• pay salaries
• pay rent
• buy stock
• pay electricity bill
• repay loans
• pay taxes

So even if a business is profitable, if cash is not available, it may face difficulty.

5) Simple Real-Life Example

Suppose you sold goods worth ₹1,00,000 on credit.

In P&L:

It may be shown as income / sales

But:

In reality:

You have not received cash yet

So your profit may look good, but your cash is still low.

This is why Cash Flow is different from Profit.

6) Main Types of Cash Flow

Cash Flow Statement has 3 major parts:

(1) Cash Flow from Operating Activities

(2) Cash Flow from Investing Activities

(3) Cash Flow from Financing Activities

This is the most important concept.

7) Cash Flow from Operating Activities

These are cash flows related to normal day-to-day business operations.

These are the main activities for which the business exists.

Examples of cash inflows:

• Cash received from customers
• Cash sales
• Commission received
• Fees received

Examples of cash outflows:

• Salary paid
• Rent paid
• Electricity paid
• Office expenses paid
• Payment to suppliers
• Tax paid

Meaning:

This tells whether the business’s main operations are generating cash or not.

Example:

A shop receives cash from customers = ₹5,00,000
It pays rent, salary, suppliers, etc. = ₹3,80,000

Then:

Operating Cash Flow = ₹1,20,000

That means business operations generated positive cash.

8) Cash Flow from Investing Activities

These are cash flows related to purchase and sale of long-term assets or investments.

Examples of cash outflows:

• Purchase of land
• Purchase of machinery
• Purchase of furniture
• Purchase of building
• Purchase of long-term investments

Examples of cash inflows:

• Sale of machinery
• Sale of building
• Sale of investment
• Interest received (sometimes shown here depending on standards)

Meaning:

This shows whether the business is spending cash on future growth or receiving cash by selling assets.

Example:

Business purchased machinery = ₹2,00,000
Sold old furniture = ₹20,000

Then:

Investing Cash Flow = ₹20,000 – ₹2,00,000 = ₹(1,80,000)

This is negative because cash was spent.

Negative investing cash flow is not always bad — often it means the business is expanding.

9) Cash Flow from Financing Activities

These are cash flows related to capital and borrowings.

They show how the business raises money and repays it.

Examples of cash inflows:

• Capital introduced by owner
• Issue of shares
• Bank loan taken
• Debentures issued

Examples of cash outflows:

• Loan repayment
• Dividend paid
• Interest paid (sometimes classified differently depending on standards)
• Drawings by owner (in small business context)

Meaning:

This tells how the business is financing its activities.

Example:

Owner introduced capital = ₹1,50,000
Bank loan taken = ₹2,00,000
Loan repaid = ₹50,000

Then:

Financing Cash Flow = ₹3,50,000 – ₹50,000 = ₹3,00,000

So financing activities increased cash by ₹3,00,000.

10) Structure / Format of Cash Flow Statement

Cash Flow Statement

for the year ended 31 March 20XX

A. Cash Flow from Operating Activities

Cash received from customers …….. ₹5,00,000
Less: Cash paid for expenses …….. ₹3,80,000
Net Cash from Operating Activities = ₹1,20,000

B. Cash Flow from Investing Activities

Sale of furniture ………………………… ₹20,000
Less: Purchase of machinery …….. ₹2,00,000
Net Cash used in Investing Activities = ₹(1,80,000)

C. Cash Flow from Financing Activities

Capital introduced ……………………… ₹1,50,000
Loan taken …………………………………. ₹2,00,000
Less: Loan repaid ………………………. ₹50,000
Net Cash from Financing Activities = ₹3,00,000

Net Increase in Cash:

₹1,20,000 – ₹1,80,000 + ₹3,00,000 = ₹2,40,000

If opening cash balance = ₹60,000

Then:

Closing Cash Balance = ₹3,00,000

11) Cash Flow Formula

Net Cash Flow = Total Cash Inflows – Total Cash Outflows

And:

Closing Cash = Opening Cash + Net Cash Flow

This is the basic idea.

12) Cash vs Profit — Very Important

This is where many students get confused.

Profit is not equal to Cash.

A business may have:

• High profit but low cash
  or
• Low profit but strong cash

Why?

Because:

• some sales are on credit
• some expenses are unpaid
• some expenses like depreciation reduce profit but not cash
• loans bring cash but are not income
• purchase of machinery uses cash but is not an expense in full in P&L

So cash flow gives a more practical view.

13) Difference Between P&L and Cash Flow

Basis	Profit & Loss Account	Cash Flow Statement
Shows	Profit or loss	Actual cash movement
Based on	Accrual concept	Cash concept
Includes credit transactions?	Yes	No, only actual cash
Depreciation included?	Yes	No cash outflow
Main purpose	Measure profitability	Measure liquidity

Simple understanding:

• P&L says: “Business earned profit”
• Cash Flow says: “But did cash actually come?”

14) Difference Between Balance Sheet and Cash Flow

Basis	Balance Sheet	Cash Flow Statement
Shows	Financial position	Movement of cash
Date / Period	On a particular date	For a period
Includes	Assets, liabilities, capital	Cash inflow and outflow
Focus	What business owns and owes	How cash changed

15) Cash Equivalents Meaning

Cash Flow Statement includes not only cash but also cash equivalents.

Cash equivalents are:

Short-term, highly liquid investments that can quickly be converted into cash.

Examples:

• Treasury bills
• Short-term deposits
• Commercial paper (short-term)
• Money market instruments

In basic exams, you can simply say:

Cash equivalents are near-cash items.

16) Positive Cash Flow and Negative Cash Flow

(A) Positive Cash Flow

When cash inflows are more than outflows.

Meaning:

• good liquidity
• business can pay bills more easily

(B) Negative Cash Flow

When cash outflows are more than inflows.

Meaning:

• cash shortage may arise
• business may face payment problems

But negative cash flow is not always bad.

Example:

If a company buys new machinery, cash goes out now — but that may help growth later.

So we must see why cash is negative.

17) Importance / Advantages of Cash Flow Statement

Cash Flow Statement is very useful for business analysis.

Importance:

(1) Shows Liquidity Position

It tells whether the business has enough cash.

(2) Helps in Short-Term Planning

Management can plan salary, rent, stock purchase, and loan repayment.

(3) Helps Investors and Banks

They can judge whether the business is financially stable.

(4) Explains Change in Cash Balance

It tells why cash increased or decreased.

(5) Useful for Financial Control

Helps avoid cash shortage.

(6) Better than Profit Alone

Profit may be accounting profit, but cash flow shows actual cash strength.

18) Limitations of Cash Flow Statement

Like every statement, it also has limitations.

Limitations:

(1) Ignores Non-Cash Transactions

Some important transactions are not shown if cash is not involved.

Example:

• Depreciation
• Credit sales
• Credit purchases

(2) Does Not Show Full Profitability

Cash flow shows liquidity, not complete profitability.

(3) One Period View Only

It shows movement for one period, not future guarantee.

(4) Can Be Misinterpreted

Negative investing cash flow may look bad, but may actually mean growth.

So it should be read together with:

• Balance Sheet
• P&L Account

19) Methods of Preparing Cash Flow Statement

There are 2 methods:

(1) Direct Method

(2) Indirect Method

(1) Direct Method

Under this method, actual cash receipts and actual cash payments are shown.

Example:

• Cash received from customers
• Cash paid to suppliers
• Cash paid for salary
• Cash paid for rent

This method is easy to understand.

(2) Indirect Method

This method starts with:

Net Profit

Then adjustments are made for:

• non-cash expenses (like depreciation)
• changes in current assets
• changes in current liabilities

This method is commonly used in practice.

20) Example of Cash Flow in Daily Life

Imagine you earn ₹50,000 salary in a month.

Cash inflow:

• Salary received = ₹50,000

Cash outflow:

• Rent = ₹10,000
• Food = ₹8,000
• Travel = ₹5,000
• Mobile/Internet = ₹2,000
• EMI = ₹10,000

Total outflow = ₹35,000

Net Cash Flow:

₹50,000 – ₹35,000 = ₹15,000

This means your cash increased by ₹15,000.00

This is personal cash flow.
The same logic applies to business.

21) Final Conclusion

A Cash Flow Statement is a very important financial statement because it shows the real cash position of a business. It helps management, investors, creditors and banks understand whether the business can meet its payment obligations. While P&L shows profit, and Balance Sheet shows position, Cash Flow shows actual cash movement.

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