Question

Explain why the income statement can also be called a “profit-and-loss statement.”

What exactly does the word balance mean in the title of the balance sheet?

Why do we balance the two halves?

Answer 1

Explain why the income statement can also be called a “profit-and-loss statement.”?

As we know that income statement is prepared for an accounting period to know actual profits and actual losses for that accounting period that is why income statement is known as profit and loss statement too.

Income statement is consisted of revenues and expenditures for an accounting period. Excess of revenues over expenditures is known as profits and excess of expenditures over revenues is known as loss. So when income statement is prepared for knowing profits and losses then income statement is known as profit and loss statement.

What exactly does the word balance mean in the title of the balance sheet?

As we know that balance sheet is a financial statement which is prepared at a specified date to disclosed balances of real and personal accounts. So balance refers to the balances of real and personal accounts (balances of assets, liabilities, share capital , retained earnings) etc. on a specified accounting date.

So word ‘balance’ in balance sheet means balances of assets, liabilities, share capital , retained earnings) etc. on a specified accounting date.

Why do we balance the two halves?

We balance two halves of the balance sheet on a specified date to match the balances of assets and shareholders’ funds & liabilities. In other words we can say that we balance the two halves of the balance sheet to know match and mismatch between assets and liabilities parts of the balance sheet.