Question

Your friend is the owner of a small but successful business which provides web design services. He comments that he only cares about the bottom line - the line on the income statement that shows the net income or net loss for the period. He also never bothers to read the balance sheet.  

1. What type of accounts are reported on the income statement? Give one example of each.
2. What type of accounts are reported on the balance sheet? Give one example of each.
3. Is the balance sheet superfluous, or is there valuable information reported on it? Explain your answer thoroughly.
4. Comment substantively on the posts of at least two of your classmates.

Answer 1

a) The Income Statement gives details of Income and Expense. Theses accounts are called nominal accounts since they are closed at the end of the accounting period to Income summary account and finally to Retained earnings.

Example: Revenue – Sales revenue, service revenue, Interest received, Dividend received

Expense – Salaries and wages, rent expense, depreciation expense, Utilities expense

b) The Balance sheet consists of Assets, Liabilities and Owners’ Equity. It is statement of position as on a particular date. Only Real accounts get reported on Balance sheet

Example: Assets – Cash, Accounts receivable, Inventory

Liabilities – Accounts payable, interest payable, unearned revenue

Owner’s Equity- Capital balance, Retained earnings,

c) A Balance sheet is a statement of assets, liabilities and Owners’ Equity as on particular date. The assets are equal to Liabilities plus Owners Equity. The Balance sheet helps in understanding financial position and strengths and weakness of a business. It helps in below ways:

· It helps in understanding various type of assets in business for example : Current assets, long term investments, fixed assets

· It helps in understanding total debt in business. Total debt of business is equal to current liabilities plus long term debt

· It helps in understanding net worth of a firm. Net worth = Total assets – Total liabilities

· It helps in calculating various ratios to understand business better .For example : Current ratio , Quick ratio, Debt equity ratio, etc

· It helps end users in taking decisions like extend bank loan, investment, extend credit etc.