Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
Chapter 21
Chapter 22
Chapter 23
Chapter 24
Chapter 25
Chapter 26
Chapter 27
Chapter 28

Chapter 2

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What has the business done?

These transactions make the basis for the simplest PROFIT AND LOSS REPORT:


                        Gardening                                 $50


               Total Income                                     $50



                        Fuel                                            $5

                        Disposal                                  $15


               Total expense                                     $20


               Net Profit                                           $30


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




                                                                                    Original Investment                $17,000

                                                                                    Retained Earnings                          30


                                                                                    TOTAL EQUITY                 $17,030


            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 owners (or accountants) choice.  QuickBooks slightly narrows that choice, as is explained in the next chapter, Chart of Accounts.

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Last modified: May 21, 2004