This account shows the gross profit for the period and all the indirect cash expenses (i. e., salaries, rent and electricity). It also includes indirect non – cash expenses such as depreciation and provision for bad debts, expenses accrued but not yet paid (i. e., unpaid electricity) and expenses that were incurred but already paid in advance by the company (i. e, prepaid rent). It also shows the net profit or net loss for the period. All the indirect or operating expenses (as enumerated above) are added up. The total amount of these expenses is then deducted from gross profit.
The difference is the net profit for the period. The balance sheet shows the financial position of the company at any given point in time. It shows the company’ s assets, liabilities and equity. The balance sheet is used for various purposes. Creditors analyze the balance sheet to determine if the company can pay them. The owners analyze the balance sheet to determine if their investments are earning and if they can declare dividends for the stocks they own. The balance sheet contains the current assets such as cash, receivables, stocks on hand, prepayments; non – current assets such as property and equipment and intangible assets; current liabilities such as payables, accrued expenses and short-term loans; non – current liabilities such as long-term bank loans and equity or the owner’ s capital. The balance sheet is divided into the assets and liabilities and equity.
Assets are then subdivided into two major categories: current assets and non – current assets. The balances of the property and equipment such as land, buildings, machinery, equipment, etc. are added, less accumulated depreciation plus other non – current assets such as intangible assets to arrive at the total non – current assets.
The balances of cash, receivables (net of the allowance for bad debts), stocks on hand and prepayments are added to calculate total current assets. Similar to assets, liabilities are also divided into current and non – current liabilities. The total amount of current liabilities is calculated by adding the payables, accrued expenses and short-term loans.
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