Similarly, the beginner oftentimes confuses the sales income record with the cash record of a cash sale transaction. Also, when cash is disbursed for expense purposes, the decrease in the asset is often confused with the expense record. When an expense is incurred it brings about either a decrease in assets, usually cash if the transaction is settled at once; or an increase in liabilities, usually an accrued expense item if the transaction is not immediately settled. Accordingly, in making the record the accounting department must show the decrease in the asset or the increase in the liability in the balance sheet group of records and the source of that decrease or increase under some expense title in the profit and loss group of records. Familiarity with the titles appearing in the profit and loss statement should prevent this confusion.
Illustration.—To show the interactions between the balance sheet and the profit and loss groups of records, the following illustration is given. There is shown first a comparative balance sheet, indicating the condition of a business at the beginning and the end of a period. This comparative balance sheet, it will be noted, shows a net profit of $33,250. There is also given a statement of profit and loss, showing the sources of the income and the expenses of the business. The statement indicates a net profit of $33,250 for the period. By starting with the financial condition as indicated by the balance sheet at the beginning of the period and working into it the operations for the year as shown by the statement of profit and loss, and by using the balance sheet at the end of the period as a goal, we can trace the probable interaction of the two types of records for the period.
Jackson L. Gordon
Comparative Balance Sheet
December 31, 1922 and December 31, 1921
| Assets | 1922 | 1921 | Increase and Decrease | ||
| Cash | $ 10,000.00 | $ 15,000.00 | - | $ 5,000.00 | |
| Accounts Receivable | 100,000.00 | 119,000.00 | - | 19,000.00 | |
| Merchandise | 70,000.00 | 65,000.00 | + | 5,000.00 | |
| Unexpired Insurance | 1,000.00 | 250.00 | + | 750.00 | |
| Plant and Equipment | 350,000.00 | 325,000.00 | + | 25,000.00 | |
| Total Assets | $531,000.00 | $524,250.00 | + | $ 6,750.00 | |
| Liabilities | |||||
| Notes Payable | $ 30,000.00 | $ 35,000.00 | - | $ 5,000.00 | |
| Accounts Payable | 50,000.00 | 40,000.00 | + | 10,000.00 | |
| Accrued Sales Salaries | 2,500.00 | 1,500.00 | + | 1,000.00 | |
| Mortgage Payable | 150,000.00 | 200,000.00 | - | 50,000.00 | |
| Depreciation Reserve Plant and Equipment[1] | 50,000.00 | 32,500.00 | + | 17,500.00 | |
| Total Liabilities | $282,500.00 | $309,000.00 | - | $26,500.00 | |
| Net Worth | |||||
| Jackson L. Gordon, Capital | $248,500.00 | $215,250.00 | + | $33,250.00 | |
Jackson L. Gordon
Statement of Profit and Loss For the Year Ending December 31, 1922
| Sales | $470,000.00 | ||
| Sales Returns | 20,000.00 | ||
| Net Sales | $450,000.00 | ||
| Cost of Goods Sold: | |||
| Merchandise on Hand December 31, 1921 | $ 65,000.00 | ||
| Purchases | 305,000.00 | ||
| Inward Freight and Cartage | 15,000.00 | $385,000.00 | |
| Deduct—Merchandise on Hand | |||
| December 31, 1922 | 70,000.00 | ||
| Cost of Goods Sold | 315,000.00 | ||
| Gross Profit | $135,000.00 | ||
| Selling Expenses: | |||
| Sales Salaries | $ 20,000.00 | ||
| Advertising | 30,000.00 | ||
| Sundry Sales Expense | 10,000.00 | $ 60,000.00 | |
| General Administrative Expenses: | |||
| Office Salaries | $ 10,500.00 | ||
| Insurance | 3,000.00 | ||
| Sundry Office Expense | 2,000.00 | ||
| Depreciation | 17,500.00 | 33,000.00 | |
| Financial Management Expenses: | |||
| Interest Cost | $ 10,000.00 | ||
| Sales Discounts | 7,000.00 | 17,000.00 | |
| Total Operating Expenses | $110,000.00 | ||
| Financial Management Income: | |||
| Interest Income | $ 250.00 | ||
| Purchase Discounts | 8,000.00 | 8,250.00 | |
| Net Operating Expenses | 101,750.00 | ||
| Net Profit for the year | $ 33,250.00 | ||
Interrelation Between Sales Income, Accounts Receivable, and Cash. In these two statements, if to the outstanding accounts at the beginning of the period we add the net sales for the period as shown in the profit and loss summary, and if from their sum we deduct the sales discounts allowed customers and the accounts outstanding at the close of the period, as shown by the comparative balance sheet, we arrive at the amount of cash received from customers during the year. This is shown by the following statement:
| Accounts Receivable, December 31, 1921 | $119,000.00 | ||
| Net Sales for the year | 450,000.00 | $569,000.00 | |
| Deduct: Sales Discounts | $ 7,000.00 | ||
| Accounts Receivable, December 31, 1922 | 100,000.00 | 107,000.00 | |
| Cash Received from Customers during year | $462,000.00 | ||
Interrelation Between Purchases, Accounts Payable, and Cash. The amount of cash paid for merchandise during the year may be arrived at similarly, as indicated by the following statement:
| Accounts Payable, December 31, 1921 | $ 40,000.00 | ||
| Purchases during the year | 305,000.00 | $ 345,000.00 | |
| Deduct: Purchase Discounts | $ 8,000.00 | ||
| Accounts Payable, December 31, 1922 | 50,000.00 | 58,000.00 | |
| Cash Paid for Merchandise during year | $287,000.00 | ||