Share
Explore BrainMass

Effect of operating profitably on the balance sheet

Explain the effect of operating profitably on the balance sheet of a business entity.
Does the receipt of cash by a business indicate that revenue has been earned?
Does the payment of cash by a business indicate that an expense has been incurred?

Solution Preview

Use has been made of material at:
highered.mcgraw-hill.com/ sites/dl/free/0072396881/23695/ch3.pdf

The effect of operating profitably on the balance sheet of a business entity:

As a result of operating profitably the company has a net income. Net income is an increase in owners' equity resulting from the profitable operation of the business.

Net income does not consist of any cash or any other specific assets. Rather, net income is a computation of the overall effects of many business transactions on owners' equity.

The effects of net income on the basic accounting equation are as follows:

Assets = Liabilities + Owners' Equity

Owner's Equity increases.

Assets Increases (e.g. either cash increases or the company uses net income to purchase assets such as inventory) or Liability decreases (e.g. the company uses net income to pay off creditors ) or both occur simultaneously to keep the equation balanced.

In the balance sheet, the changes in owners' equity resulting from profitable or unprofitable operations are reflected in the balance of the ...

Solution Summary

Solution answers three questions: the effect of operating profitably on the balance sheet of a business entity, does the receipt of cash by a business indicate that revenue has been earned and does the payment of cash by a business indicate that an expense has been incurred?

$2.19