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  • July 12, 2024
  • Last Update May 7, 2023 10:40 am
  • Hannover

Balance Sheet

Whereas the profit and loss account is anxious with financial performance over a period of your time, a record is worried with the financial position of a business at a selected date. ‘Financial position’ means a summary of what the business owns, called ‘assets’, like buildings, machinery and raw materials and what the business owes, called ‘liabilities’, like amounts because of banks and amounts due to suppliers. Thus a record may be a financial photograph of a business at a selected date like the top of the month or the tip of the year.

A record is an example of the twin aspect, another important accounting convention. This stipulates that each accounting transaction has two equal and opposite elements. Since these two elements must balance, total assets should equal total liabilities. we want to understand what the assets of an organization are and the way they need been financed. Details of the assets only provide an incomplete picture. we’d like to assess if they need been financed during a sensible way, as an example by not placing an excessive amount of reliance on bank borrowings.

The profit and loss account/income statement

It is concerned with financial performance over a given period of your time to answer the question ‘How much profit has the business earned?’

Profit equals the revenues or sales or turnover generated less the prices incurred.

Earning a profit and generating cash aren’t the identical thing. As we’ve seen, revenues are recognized when goods or services are provided to customers, not when the cash is received from them.

Costs are recognized after they are incurred, not when the cash is paid out.

The record

A description of what a business owns (called assets) and what it owes (called liabilities) at a specific date.

The focus is on financial position. What are the company’s assets?

How have these assets been financed?

Don’t forget that, thanks to the twin aspect convention, assets should always equal liabilities. Every accounting transaction has two equal and opposite elements.

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