The profit and loss account of a company is normally divided into two sections, namely the trading account which is designed to show the gross profit arising from the purchase and the sale of goods and the profit and loss account, which shows the final net profit after all expenses or running the business and selling the goods have been deducted. In the case of a manufacturing concern, the trading account is itself divided to show details of the cost of manufacturing the product, as well as the gross profit on selling them.
The balance-sheet sets out the liabilities assets and the interests of the proprietors at the close of the accounting period and disclose the financial state of affairs at that particular date.
It must be remembered that the balance-sheet is not an account but a statement of the balances in the books. It cannot be said that the balance sheet is a statement of assets and liabilities only because some of the debit balances may not represent assets in the ordinary sense of the words, but may take the form of losses not written off, expenses carried forward etc. on the other hand credit balances may be included which are not liabilities but represent part of the interest of the proprietors in the net assets of the business for example, an accumulated balance of profit neither is the balance-sheet nor a statement of values, since the amounts at which certain assets are appeared in the balance-sheet may be remote from their market values at the date on which the balance sheet is drawn up.
It is convenient to regard the balance-sheet as a statement showing, on the one hand, the amount of the funds employed in the business and the funds from which those sources are derived. Examples of such funds are capital brought in by the proprietors, profits which have not been drawn loans bank overdrafts as well as liabilities to creditors. On the other hand, there is the employment of those funds, that is, the assets acquired by the expenditure of such funds to the extent that they have not been used up or written off out of profits.
The value at which the fixed assets are shown is not their market but the amounts of capital originally spent on acquiring them, less such part as has been used up.
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