Importance of Balance Sheet

1. It shows the financial position of the organization for a certain period by showing details about capital, assets and liabilities.
2. It helps to test the liquidity position of the organization by providing necessary infomation for the calculation of liquidity ratios.
3. It also helps to know solvency position i.e., long term loan paying ability of a firm.
4. It shows capital structure i.e. the position of owner's capital, shareholder's capital and borrowed capital of a firm.

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Items of credit side of Profit and Loss Account

1. Gross profit transferred from trading account.
2. Various incomes: Discount received, commission received, rent received, interest received, bad debt recovered, commission received etc.

After entering all the expenses and incomes in the debit and credit side of profit and loss account respectively, net profit is found on the debit side of profit and loss account if credit total figure is greater than debit total. But it will be net loss if the debit total is heavier than the credit total.

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Balance Sheet

Balance sheet is also known as the statement of assets and liabilities, which shows the financial position of the organization at a given date of accounting period. It is the last part of final accounts to be prepared with the help of trial balance after the preparation of profit and loss account.

According to Freeman,"A balance sheet is an item wise list of assets, liabilities and proprietorship of a business at a certain date."

Features of Balance Sheet:

1. It shows the financial position of the business on a particular date.
2. It gives the knowledge of assets and liabilities.
3. It is a statement but not an account like trading and profit and loss account.
4. Total figure of assets side is always equal to the total figure of liability side.

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Items of debit side of Profit & Loss Account

1. Gross loss transferred from trading.
2. Office and administrative expenses: Office salaries, office rent, office lighting, printing and stationery, legal charges, general expenses, audit fees, insurance, postage etc.
3. Financial expenses: Interest on loan, discount allowed, bank charges, interest on capital etc.
4. Selling expenses: Salesman salaries and commission, advertising, brokerage commission, free samples, bad debts, traveling expenses etc.
5. Distribution expenses: Carriage outwards, warehouse expenses, warehouse rent and insurance, delivery van expenses, packing expenses etc.
6. Other items: Depreciation on fixed assets, provision for bad debts, repairs and renewable etc.

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Profit and Loss Account

After the preparation of the Trading account, Profit and Loss Account is prepared. Profit and Loss account is taken as the second part of the final account. It is prepared to calculate the net profit or loss of the business made during a certain period. Profit and loss account contains all expenses or losses and incomes or gains that have not been dealt with while preparing the trading account.

According to Prof. Carter,''A profit and loss account is an account into which all gains and losses are collected, in order to ascertain the excess of gains over the losses or vice-versa.

Importance of Profit and Loss Account:
- It helps to determine the net profit or net loss made by a business during a year.
- It helps to determine the ratio between the indirect expenses and net profit.
- It is helpful to calculate the ratio between net profit and gross profit.

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Posted in Trading Account