Distinguish between accounts that are presented in the income statement and balance sheet - Essay Example

Finance and Accounting Finance and Accounting To answer the question it’s good first to understand the difference between a balance sheet and an income statement. Balance sheet is a statement of account that describe the overall position of a business within a specified period of time, but it can also describe the overall position of the business from start of business to the that present time, while an income statement describes the current year performance, it details the current year profit margin.

Income statement is also known as profit and loss account it shows end year income, expenses and the profit. The accounts used in income statement representation or preparation are, revenue, expenses, losses and profit accounts while those that are used in the preparation of balance sheet are assets, liabilities and owners equity accounts. Good example of liabilities and equity accounts are taxes, notes, loans, payroll accounts and many more. It is easier to represent this two difference balance sheet and income statement accounts through a chart of accounts, this is a list of all the accounts that are used to record financial transactions (Berezin, 2005).

Current assets this are the materials or goods that one have in an organization or business that are disposable for certain returns within a short period of time , majorly they are the stock of the business and they controls the inflow of cash into the business through a short time. While current liabilities are the debt that ones have to other people or the current debt of the business this is control by the creditors account. To relates the two there is a ratio that is used known as the current ratio this differentiate the two by dividing each other and an increase in current asset through a reduction in current liabilities shows that the business is doing fine, but an increase in current liabilities through a decrease in current asset proof that the business is under duress and something should be done to reduce that short.

This is the dependency between the two, ones increase leads to the other decrease. To relate the two through balance creation or changes is an increase in current asset leads to a reduction in current liabilities through payments; thus, reducing the debt or creditors balance while increasing the asset balance in the business (Fields, 2011).Considerations of current asset and liabilities are one of the fundamentals of a business; the relationship between the two is what keeps the business alive and kicking.

The two are mainly related to payment terms and inventory policies. This is through a study of asset liability management and risk management this can be shown through defining risk and consideration of returns relative to liability portfolio. Research have been done by many trying to come up with a defined conclusion on the matter but a substantial understanding has eluded many and what is left are theories that’s tries to explain the matter in consideration to finance of the business (Berezin, 2005).

Management should ensure that there is a good balance between current asset and liabilities as they are the controls of the business, this can be related to payments methods or terms as well as inventory policies and credit control. An increase in current assets over current liabilities shows that more funds are needed from investors; thus, through loans and equity but when there is an increase of current liabilities over current assets shows the business is financed by creditors or even employees through salaries delays and such a view thus less funding is needed from investors hence sustainability which strengthens the overall position of the business (Fields, 2011).

ReferencesBerezin, M. (2005). "Emotions and the Economy" in Smelser, N.J. and R. Swedberg (eds.). The Handbook of Economic Sociology, Second Edition. Princeton, NJ: Princeton University Press.Fields, E. (2011). The essentials of finance and accounting for nonfinancial managers. New York: American Management Association.