In this post, we will learn about Balance Sheet.
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Balance Sheet
A balance sheet is a financial statement that shows the company’s financial position at a specific point in time. It presents a snapshot of the company’s assets, liabilities, and shareholder equity. The balance sheet follows the accounting equation, which states that assets equal liabilities plus shareholder equity.
The balance sheet has two sections:
- Assets: The assets section of the balance sheet lists all of the resources that a company owns or controls. Assets are generally classified into two categories – current assets and non-current assets. Current assets are assets that can be converted into cash within a year or less, while non-current assets are assets that are held for longer than a year.
- Liabilities and Equity: The liabilities and equity section of the balance sheet shows how the assets are funded, either through liabilities or through shareholder equity. Liabilities are obligations that a company owes to others, while shareholder equity represents the amount of money that shareholders have invested in the company. This section is also divided into two categories – current liabilities and long-term liabilities. Current liabilities are debts that are due within a year or less, while long-term liabilities are debts that are due in more than a year.
Trading Account
The trading account is an account that shows the gross profit or gross loss of a business for a given accounting period. It is a part of the final accounts of a trading concern and includes all direct expenses, direct incomes, and cost of goods sold. The purpose of preparing a trading account is to determine the gross profit or loss made by a business during a particular period.
The basic formula for calculating the gross profit or loss is:
Sales – Cost of Goods Sold = Gross Profit or Loss
The trading account includes the following items:
- Opening stock
- Purchases
- Direct expenses (e.g. wages, rent, etc.)
- Closing stock
- Direct incomes (e.g. sales returns, etc.)
Once the trading account is prepared, the figure for gross profit or loss is transferred to the profit and loss account.
Profit and Loss Account
Profit and Loss Account is a type of financial statement which reflects the outcome of business activities during an accounting period (i.e. Profit or loss).
Profit & loss a/c is popularly known as P&L A/c. It is also called as Profit and Loss Statement or income and expense statement.
Net profit = Gross profit – Expenses + Other income
Difference Between Trading Account and Profit & Loss Account
| Parameters | Trading Account | Profit & Loss Account |
|---|---|---|
| Meaning | Trading account used to find the gross profit/loss of the business for an accounting period | Profit and loss account or Income statement is used to find the net profit/loss of the business for an accounting period |
| Timing | Trading Account is prepared first and then profit and loss account is prepared. | Profit/Loss Account is prepared after the trading account is prepared. |
| Purpose | For knowing the gross profit or gross loss of a business | For knowing the net profit or net loss of a business |
| Stage | It is the first stage in the creation of the final account. | it is the second stage in the creation of the final account. |
| Dependency | It is not dependent on trial balance | It is dependent on trading account |
| Transfer of Balance | The balance in the form of Gross loss or Gross Profit of the trading account will be transferred to the Profit and Loss Account | The balance in the form of Net loss or Net Profit of the profit and loss account will be transferred to the Balance Sheet |
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FAQs on Balance Sheet
What is the definition of Balance Sheet?
A balance sheet is a financial statement that shows the company’s financial position at a specific point in time. It presents a snapshot of the company’s assets, liabilities, and shareholder equity. The balance sheet follows the accounting equation, which states that assets equal liabilities plus shareholder equity.
How many sections are there in Balance Sheet?
The balance sheet has two sections:
1. Assets: The assets section of the balance sheet lists all of the resources that a company owns or controls. Assets are generally classified into two categories – current assets and non-current assets. Current assets are assets that can be converted into cash within a year or less, while non-current assets are assets that are held for longer than a year.
2. Liabilities and Equity: The liabilities and equity section of the balance sheet shows how the assets are funded, either through liabilities or through shareholder equity. Liabilities are obligations that a company owes to others, while shareholder equity represents the amount of money that shareholders have invested in the company. This section is also divided into two categories – current liabilities and long-term liabilities. Current liabilities are debts that are due within a year or less, while long-term liabilities are debts that are due in more than a year.