Question

Which one of the following statements best explains the most important difference between the balance sheet and the profit and loss statement? The income statement presents the economic and operational results of financial performance of firms by considering revenues and expenses over a specific operating period. The balance sheet reflects the financial condition with its sections on a particular date or specific point in time. The balance sheet is prepared on cumulative basis (over a period of time, such as year) but the income statement is not prepared on cumulative basis. The balance sheet shows the net profit or loss incurred over a specific operating period. The profit and loss statement shows the liquidity and solvency position of a particular company. The balance sheet proves and reflects the fundamental accounting equation but the income statement does not because it is cumulative.

Answer 1

Answer

• Correct Answer = Option #1:
  “The Income Statement presents the economic & operational results of financial performance of firms by considering revenues and expenses over a specific operating period. The Balance Sheet reflects the financial condition with its sections on a particular date of specific point of time.”
  
  The reason being that Income Statement is prepared for a specific period of time (For example, “for the year ended 31 Dec), and its not cumulative. It shows Revenues and expenses during that specific period of time. Net Income or Net Loss as a result of revenues and expenses evaluate the economic and operational results of the financial performances. On the other hand, Balance Sheet is prepared for a particular time (for example: Balance sheet as at Dec 31) and its contains cumulative balances of all the Asset, Liability of Equity accounts. It reflects the financial conditions as to how much assets, liability or equity a business had on a particular date.