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What has the business done?
These transactions make the basis for the simplest PROFIT AND LOSS REPORT:
Income
Gardening $50
------
Total Income $50
Expense
Fuel $5
Disposal $15
------
Total expense $20
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Net Profit $30
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Which defines XE "profit, net:definition" XE "net profit:definition" NET PROFIT. For now, we will leave it in the business. As an illustration, we will “close the books” after only one transaction. (An absurd thing to do in an operating business, but it keeps the example easy to understand.)
BALANCE SHEET (After)
ASSETS LIABILITIES
Cash $10,030 Loan on truck $4,000
Truck $8,000 Loan from Bank $2,000
Tools $5,000 ------------
Total Liabilities $6,000
EQUITY
Original Investment $17,000
Retained Earnings 30
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TOTAL EQUITY $17,030
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TOTAL ASSETS $23,030 TOTAL LIABILITIES AND EQUITY $23,030
The net profit from this
operation has been moved into RETAINED
EARNINGS. In practice, retained
earnings refers to profit and loss from prior
accounting periods, less what has been paid
out to owners.
The balance sheet is still
in balance. But note carefully how
balance has been maintained. The cash is
increased by the net $30 cash received minus
cash disbursed. On the claims
(liabilities and equity) side of the balance
sheet, a corresponding thing has
happened. Equity went up $50 with the
revenue operation, and down $20 from expenses
incurred. The accounting equation
remains valid, because like changes were made
on both sides.
Equity account names are
very much a matter of owner’s (or
accountant’s) choice. QuickBooks
slightly narrows that choice, as is explained
in the next chapter, Chart of Accounts.
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