balance Sheet and profit and Loss list

In this series of articles we will also discuss:

1. Balance Sheet Explained

Rent To Own Homes In Jacksonville Florida

2. Trading and behalf and Loss Account

3. Adjustments of Final Accounts

Previously while discussing the basic accounting equation it was noted that A - L = P, where A represents assets (property and possession) owned by the business; L represents liabilities (claims against the firm of the creditors) and P represents the proprietor's funds (equity) in the business.,

Accounting belief of Income

The belief of 'income' is separate to the economists and accountants. Economists belief of earnings is that of 'real income' meaning thereby the increase-in real terms of the ownership funds between two points of time.

In accounting the term earnings is known as 'net profit'. It was stated earlier :

Sales - Merchandising cost = Gross behalf and Gross behalf - Expenses of doing firm = Net profit

In other words, earnings - Expenses = Net profit.

These terms are explained below:

Revenue

It is the monetary value of the products sold or services rendered to the customers while the period. It results from sales services and source like interest, dividend and commission etc. For example, sales affected by the firm and fee made for services rendered by the firm constitutes revenue. However, all cash receipt may nott be revenue.

Thus, money borrowed leads to cash receipt but it does not constitute revenue. Similarly further capital brought in increases proprietor's funds but it is not revenue.

Expenses/Cost of (doing business)

Expenditure incurred by the firm to earn earnings is termed as charge or cost of doing business. Examples of expenses are raw materials consumed, salaries, rent, depreciation, advertisement etc.

Cash v/s Accrual Basis of Accounting

Small business, personel professionals and non-trading concerns commonly adopt cash basis of accounting. Under this system, incomes are carefully to have been earned only when received ill cash and expenses are carefully to have been incurred only as a matter of fact paid. Hence, under this principles the behalf or loss of an accounting period is the disagreement between incomes received and the expenses paid. Though the cash basis of accounting is straightforward (no adjustment is required) but il loses its comparability.

Under accrual basis all incomes are credited to the period in which earned irrespective of the fact either received or not. Similarly, all expenses are debited to the period in which incurred irrespective of the fact either paid or not. It is a scientific basis of accounting, though a bit difficult.

Matching Concept. Requires that expenses should be matched to the revenues of the acceptable accounting period. So we must decide what are the revenues earned while a singular accounting period and the expenses incurred to earn these revenues.
It is the matching belief which justifies accrual basis of accounting.

Accruals and Deferrals

Accounting is incredible to quantum or ascertain the net earnings of the firm while the accounting period. Normally, it is the calendar year (1st January to 31st December) but in other cases it may be Financial year (Ist April to 31st March) or any other period according to the convention of the firm community of the area.

The combined impact of matching belief and the accounting period belief on accounting has resulted in accruals and deferrals.

Accrued or excellent expenses

It is the term which denotes that expenditure has been incurred while the accounting period but the same has not been paid in cash e.g. Salary, Rent, Wage etc. Becoming due but not paid.

Deferred or pre-paid expenses

It is the term which denotes that payment in cash has been made "in progress but the full advantage of this payment has not been reaped by the current accounting period, e.g., insurance paid in advance.

Accrued or excellent Income

It is the term which denotes that the earnings has been earned but the cash has not been received against the same. earnings has accrued due but not received e.g. Interest on investments etc.

Differed or Received in-advance Income

It is the term which denotes earnings which has been received (in cash) in progress but it has not been earned so far e.g. Rent received in advance. All the accruals and deferrals arc not be adjusted at the end of the accounting period (end-period adjustments) in order to find out the earnings of the firm while the period under review. The course of ascertaining (i) firm earnings and (ii) financial position is being described, in information below:

In fact, these arc two most leading of many objectives of book-keeping. In order to know the profits earned by him he prepares a trading and loss catalogue and in order to know the financial position of his firm on the last day of the financial period he prepares a Balance sheet.

Such accounts are called 'Final Accounts'. Preparing of final accounts is the concluding step of accounting cycle. In fact, final accounts contain a estimate of accounts (i) Manufacturing/ output account, (ii) Trading account, (iii) behalf and loss catalogue and (iv) Balance sheet.

Practically Balance sheet is a statement but for accounting purposes here it is treated as a part vital accounts.

The Preparing of above all or any of the above accounts depends upon the nature of the firm being carried on by the firm concerned. In case of a manufacturing firm manufacturing account, trading account, behalf and loss catalogue and Balance sheet form the parts of final accounts whereas in case of trading firm all other accounts are ready with the exception of manufacturing account. Each of these accounts furnish a definite vital facts to businessman to help to control and design the firm activities in a batter way.

balance Sheet and profit and Loss list