Question

Has anyone noticed that Cash shows up in the Asset section and Revenues and Expenses show up in the Equity section? Why is that? Isn’t Revenue and Expense the same as cash coming in and cash going out? What causes Cash to have a different dollar amount from Revenue and Expense?

Answer 1

Assets are those financial items which the company owns and equity is in the liabilities since it has to ultimately be paid off to the stockholders. Cash is what the business owns and hence is shown on the assets side. Net income i.e. the revenue minus the expenses is a part of the stockholders equity since whatever profits or incomes that the business earns belongs to the owners and is added to their balance. Although revenue and expenses is same as cash in and cash out, in accrual system of accounting only cash cannot be accounted for and there has to be corresponding financial item that has to be affected. Alone, cash balance cannot be shown in the financials and hence both cash and net income are shown in the balance sheet. Cash account not only comprises of revenue and expenses but also is affected by other capital expenses such as purchase of assets, other incomes such as interest, dividends, sale of assets. Also cash is increased on account on borrowings and decreased on repayment of liabilities. Hence, the dollar amounts for cash are different from revenue and expense.