- Asked 5/19
- 2067 Mangsir (old course) · 8 marks
- 2066 Magh (old course)
- 2069 Bhadra (old course) · 4 marks
- 2065 Baisakh (old course)
- 2064 Poush (old course)
Balance sheet and profit and loss account
Short answer
A balance sheet shows assets, liabilities, and equity on a given date, balancing as Assets = Liabilities + Equity. A profit and loss account summarizes revenue and expenses over a period to show net profit or loss. The balance sheet shows position at a date; P&L shows performance over a period.
Describe balance sheet and profit and loss account and their functions.
Balance sheet
A balance sheet is a statement of the financial position of a firm on a given date. It shows assets (what the firm owns), liabilities (what it owes) and the owner's equity, and always balances: Assets = Liabilities + Equity.
| Liabilities & Equity | Rs | Assets | Rs |
|---|---|---|---|
| Share capital | 1,000,000 | Fixed assets (plant, building) | 1,200,000 |
| Reserves | 200,000 | Stock of materials | 300,000 |
| Long-term loan | 500,000 | Debtors (receivable from clients) | 350,000 |
| Creditors (suppliers) | 300,000 | Cash and bank | 150,000 |
| Total | 2,000,000 | Total | 2,000,000 |
Functions: shows the financial strength and liquidity (current assets/current liabilities); helps in judging solvency and borrowing capacity (used in pre-qualification); shows how funds were raised and used; and is a basis for tax and investor decisions.
Profit and loss account
It summarises the revenue and expenses of a firm for a period (usually one year) and shows the net profit or loss.
| Item | Rs |
|---|---|
| Revenue (contract receipts) | 5,000,000 |
| Less: direct costs (material 2,000,000, labour 1,200,000, subcontract 500,000) | 3,700,000 |
| Gross profit | 1,300,000 |
| Less: overheads 500,000, depreciation 150,000, interest 100,000 | 750,000 |
| Profit before tax | 550,000 |
| Tax at 25% | 137,500 |
| Net profit | 412,500 |
Functions: shows how profitable the business is; helps to control costs by comparing items with budget and previous years; provides the basis for tax and dividends; and helps to decide on pricing and bidding rates.
The balance sheet shows the position at a date, whereas the profit and loss account shows the performance over a period; the two are linked since the net profit is added to the reserves.
✓ Answer checked by Claude Opus 5.5 (high effort)
Related questions
- Boiler trial heat balance sheet · Applied Thermodynamics, chapter 1
- Heat balance sheet of a diesel engine · Internal Combustion Engines, chapter 8
- SQL: customer, branch, account details · Database Management System, chapter 3
- SQL: customers with account in Dharan · Database Management System, chapter 3