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EQUITY2

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EQUITY2

 

                Matching the P&L and Balance Sheet

 

The correlation between the P&L and the balance sheet lies in this:

 

The profit on the P&L is income minus expenses.

 

On the balance sheet income appear as increased assets (combination of

increased cash assents and increased A/R liabilities)

 

On the balance sheet expenses appear as a combination of decreased

cash assets, decreased inventory assets and increased A/P liabilities.

 

Example: income=500, expenses=375, profit=125

 

On the P&L

income: 300=cash, 200=A/R

inventory expense=200 (purchases=600, net inventory increased by 400)

operating expense=175

 

On the balance sheet

cash:               assets up by 300 (cash sales)

cash:               assets down by 175 (cash operating expenses)

a/r:                assets up by 200 (a/r sales)

inventory:          assets up by 400

a/p:           liab up by 600 (inv purchases on credit)

 

change in equity: +300-175+200+400-600 = 125

 

To get started, you will have to force the balance sheet to match the

P&L. (e.g. you have to make sure that the assets minus liabilities

minus itemized equity accounts yields a retained equity value equal to

the p&l profit figure for the year.) From that point on, we suggest

running the financial reports often - perhaps  even daily  - to verify

that the above relation holds. That way you would quickly notice if you

inadvertently make an unbalanced entry somehow.

 

You needn't print these reports on paper every day - just display them

to see that they match and if they don't you need to think about what

unusual transactions you did that day which could explain the difference.