Question

Answer all the Questions and should have included 500 words in each questions:                                                                           
1. Expenses, losses, and distribution of owners are all decreases in net assets. What are the distinctions among them?
2. Is it necessary that a trial balance be taken periodically? What purpose does it serve?
3. How does information from the balance sheet help users of the financial statements?
4. What is the relationship between current assets and current liabilities?
5. What is the difference between Accounts receivable and Revenue?

Answer 1

Answer 1.

The above statement is quite right that expenses, losses and distribution of owners are all decreases in net assets. But there are differences between them. These differences can be understood with the help of following:-

Expenses:- Expense is the cost incurred in producing and selling the goods and services. According to Finney and Miller "Expense is the cost of use of things or services for the purpose of generating revenue." Following are included in the terms expenses:-

A. Cost of goods sold.(Direct Expenses)

B. Amount paid for Rent, commission, salary, advertisement etc, (Indirect Expenses)

C. Decline in the value of an asset caused by the use of such asset for business puprose (depreciation).

Thus, in simple words, expenses are incurred to generate revenues. Further, in relation to financial statements, expenses are shown in Statement of Profit & Loss account.

Losses:- This term conveys two different meanings. First, it conveys the result of business for a period when total expenses exceed the total revenues. For example, if revenue is $200000 and expenses are $240000, the loss will be $40000. Second, it refers to some fact, activity against which firm receives no benefit. For Example, loss by fire, theft or accident etc.

Losses differ from expenses because of the fact that expenses are incurred to generate revenues whereas losses do not. For example:- theft of an asset is a loss (which can not help in generating revenues in any manner) but depreciation is an expense (as it is the cost of using the asset in business). Losses are shown at the bottom line of Statement of Profit & Loss account which will be ultimately transferred to Owner's capital or as a negative figure in Reserves & Surplus.

Distributions to Owners:- Owners distributions are earnings that an owner withdraws from a business based on profit that a company has generated. In case of a company, the distributions are made to the owners of company in the form of dividend. Protocols and conventions for owner distributions vary based on business ownership structure. For example, in case of partnership entities or sole proprietorship, the distributions are the amount which owners withdraw from business in form of drawings. but in case of corporates, the earnings are distributed in form of earnings.

Regardless of the company's ownership structure, owner distributions typically do not show up on Statement of Profit & loss except as at bottomn line earnings that can subsequently distributed.

The distributions are made from the earnings which are left over with the company after incurring all expenses. If company has incurred losses for a long period of time, it would not be able to distribute to its owners. The distributions made are shown in Balance Sheet of an entity.

Answer 2.

Trial Balance:- According to Carter " Trial Balance is the list of debit and credit balances, taken out from ledgers. It also includes balances of cash and bank taken from cash book." However, as per general meaning, Trial Balance is a statement wherein all balances of all the accounts in the Ledger are incorporated.

Although it is not absolutely necessary that a trial balance be taken periodically, it is customary and desirable. A trial balance may be prepared at any time, say, at end of every month, quarter, half-year or year. Usually, it is prepared at the end of accounting period, so as to verify the arithmetical accuracy of the ledger accounts before the preparation of final accounts. It may also be noted that it is always prepared on a particular date and not for a particular period.

The trial balance accomplishes following main purposes:-

The main objects or functions of preparing a trial balance:-

1. It Ascertains Arithmetical Accuracy of the Entities' Ledger Accounts
2. It Helps for the Preparation of Final Accounts
3. To Help in Detection of Errors or Location of Fraud
4. To Obtain Summary of the Ledger accounts.

It Ascertains Arithmetical Accuracy of the Entities' Ledger Accounts:- The trial balance provides a useful check upon the ledger postings. If a trial balance tallies , it is proved that the posting to the ledger accounts is correct. In other words, it ensures that both the aspects of each transaction have been posted into the ledger i.e. debit aspects have been posted on the debit side and the corresponding credit aspects on the credit side.

It Helps for the Preparation of Final Accounts:- It provides a list of ledger accounts and their balances which may be used in preparing the financial statements and in supplying the financial data about the concern. The final accounts namely Statement of Profit & Loss Account and Balance Sheet, mainly are prepared on the basis of information incorporated in Trial Balance.

To Help in Detection of Errors or Location of Fraud:- If a Trial Balance does not tally, it indicates that some errors have occurred and the accountant will then proceed to locate those errors. Even a small difference in trial balance is given the small importance and attention as large difference because it may be possible that there may be a number of errors which have offset the effect of one another, resulting in a small composite difference.

To Obtain Summary of the Ledger accounts:- A Trial Balance serves as a summary of all the ledger accounts . Scanning the Trail Balance enables one to know the asset, liabilities, expenses, incomes etc.

Answer 3:-

A Balance Sheet is a financial statement which gives the users a 'snapshot' of the companies financial condition at a given point of time. It lists out what the company owns and what the company owes giving insights into the overall health of business. The Balance Sheet is important as it helps users in decision making.

There are various group sof people who need the information related to business. These users may be classified into two groups:

External Users:- Individuals or organisations who have present or future interest in the enterprise but are not part of management are called external users. Examples are:- Investors, creditors, lenders, government etc.

Internal Users:- Internal users are the users who have direct interest in the business enterprise such as owners, management, and employees.

1. As owners contributed the capital in business, thus, information contained in balance sheet helps them to know about the profitability and financial soundness of the company. They can find the answers to following questions with the help of information contained in Balance Sheet:-

• Whether the profits are increasing or decreasing?
• What are the reasons of their increase or decrease?
• What is the value of fixed assers and floating assets of company?

2 Management need such information for smooth running of the business enterprises. Their needs are met by the information provided by published reports such as Profit & Loss Account , Balance Sheet or Cash Flow Statements.

3. The employees may use the financial information in balance sheet to ascertain whether various amounts due to them are being deposited regularly or not.

4. It helps the bankers and investors to make sound investing decisions by answeing these questions:-

• Is it viable to invest or lend to company?
• Will this company be able to handle any rough times ahead?
• How is the company doing as compared to its competitors?

5. It also helps the managers and other users to make better strategic decisions by answering these questions:-

• Is inventory piling up?
• Are customers paying on time?
• Can the company take on more debt?

6. Creditors can need this information for knowing the creditworthiness of the company. They can know whether the amount owing to them will be repaid when due and whether they should extend, maintain or restrict the credit to the company.

Thus, from above uses, it can be stated that Balance Sheet provides all information required to take various decisions by various users. It provides answers to all their questions which may arise to their mind or are necessary for their interests.

Answer 4.

Current Assets:- Current assets are those assets which are meant for sale or wich the management would want to convert into cash within one year. As such, those assets are also termed as "Short lived or Active assets".

For example:- Accounts Receivable are expected to convert into cash within a reasonable short period, Stock is continuously sold. Current assets also include the cash and cash equivalents and other assets or resources which are commonly expected to be realised in cash or sold or consumed during the normal operating cycle of business.

Current Liabilities:- The liabilities refers to the amount which a company or business has to pay to the other parties whether they are external or internal. Current Liabilities are those liabilities which are to be paid in near future or within reasonable short period of time. For example:- bank overdraft, outstanding expenses, short term loans etc.

After reading these explanations, there can be relationships that can be found between these two terms:-

• Curent assets and current liabilities both are short terms. Their usual time to convert into cash or to dispose off is 12 months or normal operating cycle of the business enterprises.
• Thus, the main relation between both current assets and current liabilities is that they both can be reasonably expected to be settled within one year.
• Most of the companies pay current liabilities out of current assets.
• One other relation between can be represented by a most popular ratio i.e. current ratio. Current ratio represented the value of current assets that are available to pay off the current liabilities. Thus, it is defined as current assets divided by the current liabilities.
• The working capital which is the difference of current assets and current liabilities is an indication of the short term solvency of business.

Apart from the current ratio, there are other short term ratio which explains the relationship between the current assets and current liabilities, such as:-

• Acid- Test Ratio
• Cash Ratio
• Working Capital Turnover ratio

Answer 5.:-

Difference between Accounts Receivable & Revenue are as under:-

Accounts Receivable:- Account Receivables represents the amount receivable on account of sales of goods or services rendered by the company in normal course of business. Account Receivables represents those persons or firms to whom goods have been sold or services redered on credit and payment has not been received from them. They still owe money to the company.

Revenues:- A company's revenue is the total income before expenses. Revenue includes the payment for services the company performs and merchandise its sells. It aso includes any interest and dividend incomes that the company earns from its investments. Companies use their total revenue to calculate profit during a given period of time by substracting that period's expenses, such as cost of goods sold and payroll, from the total revenue earned.

From above explanations, we can clearly see the difference between these two terms. However for better understanding, following points are the main areas of differences:-

• Account Receivables also include other incomes i.e. the incomes which do not arise due to normal course of business, in other words, the non operating income. But account receivables represents those persons or firms to whom goods have been sold or services redered on credit in normal course of business.
• Thus, account receivables are asset accounts not a revenue account. However, under accrual system of accounting, the revenue is recorded at the same time when the receivables are recorded. But under cash system of accounting there are no account receivables.
• Accounts Receivables may further be divided into bills receivables whereas revenues are the total amount of income that has arisen to business by incurring the expenses.
• Account Receivables are shown in the Balance Sheet where as Revenues are shown in the Statement of Profit & Loss account.
• Account Receivables represents the sales made on credit basis whereas revenue represents the both sales i.e. the sales made in cash and on credit along with other items of incomes whether they can be operating or non-operating.