AccountingQA Latest Questions

Rahul_Jose
Rahul_Jose
In: >

  2. Pooja_Parikh Aspiring Chartered Accountant

    Financial Reporting is a common practice in accounting where the financial statements of the company are disclosed to present its financial information and performance over a particular period. It is important to know where a company’s money comes from and where it goes. Types of Financial StatementRead more

    Financial Reporting is a common practice in accounting where the financial statements of the company are disclosed to present its financial information and performance over a particular period. It is important to know where a company’s money comes from and where it goes.

    Types of Financial Statements

    There are 4 important types of financial statements such as:

    • Income Statement: This statement summarises a company’s revenue, expenses and profits. It is prepared to calculate the net profit of the company.
    • Balance Sheet: It portrays the company’s assets and liabilities in a statement. This is used to understand the financial position of the company.
    • Statement of Retained Earnings: This statement reveals a company’s changes in equity during an accounting period.
    • Cash Flow Statement: It shows the amount of cash flowing in and out of the business. It is helpful in understanding the liquidity position of the business.

    Importance of Financial Reporting

    • Understanding these financial statements is helpful in making financial decisions. One can identify certain trends and hurdles while analyzing financial statements.
    • It helps the top order management to keep a check on its outstanding debt and how to manage them effectively.
    • Financial reports are also required to be prepared by law for tax purposes. Therefore these statements have to be prepared to calculate taxable income. It also ensures that the companies are compliant with the required laws and regulations.
    • True and accurate financial reporting is also important for potential investors who need to understand the financial performance and position to come to a decision.

     

     

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Simerpreet
SimerpreetHelpful
In: >

  2. Karishma
    This answer was edited.

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.

    When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.

    The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.

    Accounting entry for loss transferred is as follows :

    Capital A/c   …Dr.

    To Profit & Loss A/c

    (being net loss transferred to capital account)

     

    Example

    A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.

    Extract of a Profit and loss a/c showing net loss is as under:

    Profit and loss A/c for the year ended …..

    Particulars Amount (Dr.) Particulars Amount (Cr.)
    To gross loss b/d xxx By gross profit b/d xxx
    To salaries xxx By bank interest xxx
    To office rent xxx By commission received xxx
    To printing and stationery xxx By rent received xxx
    To insurance xxx By dividend xxx
    To audit fees xxx By profit on sale of asset xxx
    To electricity chares xxx By Net Loss xxx
    To depreciation xxx
    To bad debts xxx
    To bank charges xxx
    To miscellaneous expenditure xxx
    To interest on loans xxx
    Total xxx

    The debit balance for a non-corporate entity is shown as a reduction from the capital account

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on…

    Liabilities Amount
    Equity and liabilities
    Capital

    Less: Profit & Loss A/c

    While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on..

    Liabilities Amount
    Equity and liabilities
    Reserves And Surplus

    Less: Profit & Loss A/c

    Conclusion:  Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.

    The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.

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Nistha
Nistha
In: >

Debit Balance
  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business. After recording all transactions in an account, if the debit side is greater thaRead more

    A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business.

    After recording all transactions in an account, if the debit side is greater than the credit side, then the account is said to have a debit balance. Similarly, if the credit side is greater than the debit side, then the account has a credit balance.

    In a P&L account, when the expenses (debit) are greater than the incomes (credit), the business is said to be in a net loss. This loss is what we call the debit balance of a Profit and Loss account. A P&L account with a debit balance can be subtracted from Capital or be shown on the asset side of the Balance Sheet.

    As you can see above, the net loss is shown on the right side of the P&L account. This represents the debit balance of P&L. Once it is transferred to the balance sheet, it is either subtracted from capital or shown on the asset side as shown in the second image. However, they cannot be shown on both sides of the balance sheet at the same time.

    However, if the credit side is greater, that is if income is greater than expenses, then the P&L account shows a credit balance which is also known as net profit. This profit is added with Capital to show the final balance in the Balance Sheet.

    Debit balance of Profit & Loss account is not preferable for a business. Hence they should put in efforts to either reduce costs or increase their income to gain profits.

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