In the preparation of financial statements there are different formats used. Whatever formats used the results will be the same. There is no prescribed format for the preparation of the income statement. The company should select a method of presenting its expenses by either function or nature; this can either be as encouraged, on the face of the income statement, or in the notes. There are accounting standards such as IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles) which are practices that are accepted globally.
Different types of businesses use different formats. For example; a sole trader would prepare a simple profit and loss account compared to a public limited liability company which will have to prepare based on IFRS or GAAP. When financial statements are not prepared based on standards it is difficult to compare with other organisations. Some businesses prepare a single step income statement format where all expenses classified by function and are deducted from total income to give income before tax. The other is a multi step format where cost of sales is deducted from sales to show gross profit, and other income and expense are presented to give income before tax. The difference between these two formats is that the single format does not show the margins while the multi step format gives the margin by classifying what is direct cost and indirect cost. These classifications are important in making good financial decisions. The single step format leads to low quality accounting information.
In a balance sheet some businesses match assets to equity and liabilities. Here equity and liabilities represent the amount invested in the form of owner’s investment plus borrowings from lenders and creditors. Assets refer to the amount of tangible and intangible properties belonging to the business. In most businesses the balance sheet is prepared matching assets less liabilities represent the owner’s...
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