Business revenue profit and loss and balance sheet cash and bank

Business revenue profit and loss and balance sheet cash and bank

Due to unfamiliarity with the technical aspects of double entry bookkeeping non accountants frequently have problems understanding the financial accounting terms of business revenue profit and loss and balance sheet cash and bank transactions. This misunderstanding has its root in that money received is not a sale, gain 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 accounting terms.

Essential double entry bookkeeping does separate business revenue debits and credits from balance sheet capital accounts. Accounting produces a profit statement which is the sum of the revenue accounts and a balance sheet which is list of the assets and liabilities. Business revenue accounts represent the description of goods and services the business has supplied as sales 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 sales assistant at the till in accounting terms the customer is offering to buy the item. The sales 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 sale 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 sales figure which is a business revenue profit and loss account item. The double entry is the amount of money received which is an asset and recorded as cash received being a balance sheet item. If the amount received is less than the record of sales the difference is money still owed by the customer and would be recorded as a debtor balance.

Staying with the retail accounting example when the goods sold were originally purchased by the shop owner produces two accounting transactions. Firstly the shop owner would order and take delivery of the goods at which point no money may have changed hands and the double entry bookkeeping is to record the item purchased 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 balance and secondly to show the amount paid by reducing the cash and bank resources. Cash and bank balances are balance sheet items as are creditor balances. Payment of the creditor is then not a business revenue transaction but the transfer of amounts between balance sheet accounts

The essence of understanding financial accounting terms is similar to the physics rule of every action having an equal and opposite reaction. In double entry bookkeeping every 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 accounting for sales is to debit the debtors account in the balance sheet as debtors are assets and credit sales in the revenue account, Double entry accounting for the money received would be between two balance sheet accounts by crediting debtors to reduce the amount owed by customers and debit the cash or bank account as the money now received is now the asset.