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

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?

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Expert Solution

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

The income statement for a period, matches the revenues for the period against the expenses incurred for earning those revenues, the net effect being a profit (if the revenues are more than the expenses) or a loss (if the revenues are less than the expenses). As the income statement finally reveals the profit or loss for the period, it 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?

The word balance means that the two sides (halves) of the balance sheet, namely the 'assets side' and the 'total liabilities and equity side' should be equal in total value.

The two halves are balanced as the asset half should have a total value equal to the value of the total-liabilities-and-equity half. This is because of the accounting equation

Assets = Liabilities+Equity.

ekkarill92 answered 1 year ago
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