31st January 2012
The profit and loss account reports on certain financial aspects of transactions that have taken place during an accounting period. It does this by showing the income which has been earned and the expenses incurred in earning it. The difference between the two is a profit if the income is higher than the expenses or a loss if the expenses are higher than the income. (Day et al, 2011, page 39) In other words income statement is a financial statement which measures company’s performance over a specific accounting period. I think these records are very useful because they provide information that shows profitability of a company during the time interval specified in its heading. We can also find out whether company is making profit or a loss. Moreover it helps in making decisions for the future. b:
The balance sheet shows the financial position of a business at a point in time, as one accounting period ends and another starts. Accounting time could be described as a stream of profit and loss accounts punctuated at regular intervals by balance sheets. By comparing them the person reading the balance sheet can find information about the state of the business at the end of the period covered by the profit and loss account. (Day et al, 2011, page 49) Purpose of a balance sheet is to show company’s liabilities, assets and equity at a point in time. It basically shows two sides: 1. where the money has come from (current and short-term liabilities) and 2. where the money has been spent ( current and short-term assets) From these figures various ratios can be utilized which will tell the bank manager/investor of the strength of the company. I believe that balance sheet is highly significant in assessing the financial strength of a business. By comparing past balance sheets with the present balance sheet the growth or decline of the business assets, liabilities and net...