"Balance Sheet is Not an Account but Nearly a Statement of Balance" – Explained
A balance sheet is not considered an account because it does not record transactions over time like journal or ledger accounts do. Instead, it is a financial statement prepared at the end of an accounting period to show the financial position of a business on a specific date. It presents the balances of all real and personal accounts, classified as assets, liabilities, and capital. The balance sheet is often referred to as a "statement of balances" because it summarizes the net balances after all accounting work is completed, ensuring that Assets = Liabilities + Capital. It reflects what the business owns and owes at a point in time, but unlike an account, it doesn’t track day-to-day activities.
---
What is Financial Accounting?
Financial accounting is a specialized branch of accounting that involves recording, summarizing, and reporting the financial transactions of a business. Its primary objective is to provide accurate financial information to stakeholders such as owners, investors, creditors, and regulatory authorities for decision-making purposes. It deals with the preparation of financial statements like the Trading Account, Profit & Loss Account, and Balance Sheet, which give a clear picture of the business's performance and position.
Definition:
Financial accounting is the process of systematically recording business transactions, classifying them, and preparing financial reports that reflect the results of operations and the financial position of the business.
---
Methods of Preparing Financial Accounts
1. Single Entry System:
Only one aspect of the transaction is recorded.
Not commonly used for official financial reporting due to lack of completeness.
2. Double Entry System:
Every transaction is recorded with both debit and credit aspects.
Universally accepted and forms the basis of modern accounting.
Follows the principle: "Every debit has a corresponding credit."
3. Accrual Basis:
Revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.
4. Cash Basis:
Transactions are recorded only when cash is received or paid.
Common in small enterprises but not suitable for companies needing audited statements.
---
Trading and Profit & Loss Account
The Trading and Profit & Loss Account is a financial statement that shows the results of operations for an accounting period.
1. Trading Account:
This account is prepared to determine the gross profit or gross loss of the business.
It includes:
Debit Side: Opening stock, purchases, direct expenses (wages, carriage inward).
After calculating the gross profit, the Profit & Loss Account is prepared to determine the net profit or net loss.
Debit Side: Indirect expenses like rent, salaries, depreciation, etc.
Credit Side: Incomes such as interest received, commissions, etc.
Net Profit/Loss = Gross Profit – Indirect Expenses + Other Incomes
---
Conclusion
The Balance Sheet is a statement, not an account, as it represents the financial balances at a specific point in time rather than tracking transactions. Financial accounting provides the structured process and principles to maintain these records accurately. The Trading and Profit & Loss Account helps in analyzing a business’s operational efficiency and financial outcomes over a period, making them crucial for business decisions and legal reporting.