Business revenue profit and loss and balance sheet cash and bank

Business revenue profit and loss and equilibrise sheet cash and bank

Due to unfamiliarity with the technical aspects of double entry record-keeping non accountants frequently have problems understanding the financial record-keeping terms of business revenue profit and loss and equilibrise sheet cash and bank transactions. This misunderstanding has its root in that money received is not a sale, acquire or profit but the settlement of a debt owed to the business. And money paid out is not an expense or loss but the settlement of a debt owed by the business in record-keeping terms.

Essential double entry record-keeping does separate business revenue debits and credits from equilibrise sheet capital accounts. Bookkeeping produces a profit statement which is the sum of the revenue accounts and a equilibrise sheet which is list of the assets and liabilities. Business revenue accounts represent the description of goods and services the business has supplied as income and goods and services bought by the business that is expenses.

The confusion can be explained in what is often perceived as a single financial transaction at the till of a shopkeeper. Receiving the money from the customer is wrongly regarded as a sale. In fact when the item is presented to the income assistant at the till in record-keeping terms the customer is offering to purchase the item. The income assistant then enters the amount to be paid in the till and that is the recording of the sale. When the customer pays that is not the understanding but payment of the money owed by the customer for that item.

When the financial accounts are prepared the till receipt would be recorded as the income figure which is a business revenue profit and loss statement item. The double entry is the amount of money received which is an quality and recorded as cash received being a equilibrise sheet item. If the amount received is less than the record of income the difference is money still owed by the customer and would be recorded as a debtor balance.

Staying with the retail record-keeping example when the goods sold were originally bought by the shop owner produces two record-keeping transactions. Firstly the shop owner would order and take delivery of the goods at which point no money might have changed hands and the double entry record-keeping is to record the item bought as a business expense in the financial accounts and also as a debt owed to the supplier, known as the creditor.

When the supplier is paid the amount paid is recorded twice, firstly to reduce the creditor equilibrise and secondly to show the amount paid by reducing the cash and bank resources. Cash and bank balances are equilibrise sheet items as are creditor balances. Payment of the creditor is then not a business revenue transaction but the transfer of amounts between equilibrise sheet accounts

The essence of understanding financial record-keeping terms is similar to the physics rule of each action having an equal and opposite reaction. In double entry record-keeping each financial transaction entered has an equal and opposite entry, the double entry.

Sales and cash received are not directly the equal and opposite but in fact are two separate financial transactions. Double entry record-keeping for income is to debit the debtors statement in the equilibrise sheet as debtors are assets and credit income in the revenue account, Double entry record-keeping for the money received would be between two equilibrise sheet accounts by crediting debtors to reduce the amount owed by customers and debit the cash or bank statement as the money now received is now the asset.