Question

One account that would be on a balance sheet would be the income taxes payable line item and is self-explanatory as it is reserved for any taxes due to all debtors within the next 12 months (Merrill Lynch, 2000). One account that would be found on an income statement would be the cost of the sales line item. This account represents the expenses incurred in producing the final sale able product and includes paid labor, the cost of items needed to make the final product, and the costs that are necessary to create the finished product without a direct connection to its completion such as the costs associated with renting a building and paying utilities so that the employees have a place to work from (Merrill Lynch, 2000). These accounts are on the correct statements. Why is understanding which statement accounts go on so important?

Answer 1

For understanding the Financial Statements and items associated with them, it is important to understand the various Financial Statements and their purpose:

Various Financial Statements are as follows:

a. Balance Sheet :

It shows the Assets and Liabilities of the business as on the year end or period end date. It shows the total assets on one side and their bifurcation into Current and Non Current Asset. While on the other side is outside liabilities and capital.

It is based on the Accounting Equation: Assets = Liabilities + Capital

b. Profit and Loss Statement

It shows the revenue and expenses made to earn such revenue during the year or period. After deducting expenses from revenue, we get net income for the period.

It is necessary to identify the profit/loss i.e., financial result for each accounting period or year.

c. Cash Flow Statement

It shows cash inflows and outflows from Operating, Investing and Financial Activities. It reconciles the opening and closing cash balances.

d. Statement of Changes in Equity(SOCE)

It shows the movement in Equity and such other equity instruments.

e. Notes to Accounts.

It provides further break up and explanation to items presented in other Financial Statements.

Conclusion:

It is important to understand all Financial Statements and items shown thereon so as to show true and correct financial reporting and classification. It also brings in comparability.