Profit and loss account and balance sheet Essay

Profit and loss account and balance sheet - Essay Example This means that the financial status of the organization can be known by simply looking at these accounts. The users of these final accounts include the owners of business, managers, shareholders, government, creditors and the directors amongst other stakeholders of the business. These are mainly the people who are directly affected by the performance of the business, which is a significant factor in regard to credit worthiness of a business. On the other hand, government taxation is usually levied depending on the profitability and size of the organization. These aspects can be known through the final accounts (Dyson 2001 p 45-48). This essay is a critical evaluation of the purpose of the Profit and Loss Account and Balance Sheet to the various users or stake-holders. This is a critical component of an organization's financial report that provides information regarding capital, the long and short term assets as well as long and short term liabilities. This means that the owners of the business can get information regarding the possessions as well as the debts of the business by simply looking at the balance sheet. It is significant in avoidance of losses in the business operations. It indicates whether assets match with the liabilities hence it is useful in setting up the business strategy. This is mainly because a business will try as much as possible to ensure that the liabilities are checked in order for them not to go beyond a certain level whereby the debts may be more than the assets, a situation that may lead to insolvency of the business, which according to Berman (2008 p 11) is referred to as balance sheet insolvency. The wise use of the balance sheet can help in avoiding bankruptcy. The balance sheet is also significant in the evaluation of expenditures as well as the debts incurred by the business. The total spending by the business in a trading period is reflected in detail on the liabilities section. This gives the managers an opportunity to understand the items which significantly reduce the assets of the business. This knowledge is important in helping the managers to develop strategies for reducing the expenditures especially on the needless items. Expenses can be reduced through the use of inexpensive materials as well as the expenses that the business can do without. Strategies can also be developed to leave the assets that are not very necessary to the organization in order to pay the owing debts. (Weekman 2003 p 45- 51). Most of the time a business will be anticipating income which needs to be tracked in order to ensure that it is not lost before it is acquired. The balance sheet helps in tracking these receivables. It gives a detailed list of these receivables which indicates the payments owed to the business by customers. These payments are usually apparent in the balance sheet, which makes it possible for the managers to make a follow up in regard to their clearance. It is also significant in helping the managers to make a critical analysis of the inclination of the receivables and the amounts owing (Dyson 2001 p 56). They are able to identify whether the anticipated income is taking longer than expected and whether there is anything that can be done to facilitate