Tuesday 11 April 2017

Why profit is listed with the liabilities in the Balance Sheet?

Assets and Liabilities in the Balance Sheet

  • Assets in the Balance Sheet are the debit balances in the bookkeeping system.
  • Liabilities in the Balance Sheet are credit balances in the bookkeeping system.


Credit and Debit Balances in the Profit Statement

  • In the Profit Statement, sales and income are the credit balances.
  • In the Profit Statement, costs are the debit balances.
  • The net total of all the balances is the profit or loss.
  • This one figure (profit or loss) goes into the Balance Sheet as a single item.
  • A profit is a credit which is listed with the liabilities.


Explanation on why profit (a credit balance in the Profit Statement) is listed with liabilities in the Balance Sheet

  • The explanation is that the profit belongs to someone outside the business. 
  • If the Balance Sheet is for a company, the profit belongs to the shareholders.
  • It may one day be paid to them in the form of a dividend or by return of capital on the winding up of the company.

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