All Business/Accounting Transactions influence the Balance Sheet

Every accounting transaction has it effect on the balance sheet. To understand this we need to look at the process of final accounting during which we prepare the balance sheet.

Route to the Balance Sheet

All nominal accounts are closed - to ascertain profits

To ascertain the profits/losses made by the organisation during the accounting period, all the nominal accounts are closed (at the end of the accounting period) by transfer to either the manufacturing account , trading account or profit and loss account as the case may be.

The balance in the Profit and Loss account which we call Net Profit represents the residue of the nominal account balances.

Profits are capitalised

The P and L a/c balance is either added to the Capital (profits increase capital) or to the profit and loss appropriation account which is shown as a distinct account in the balance sheet, by transferring it to the respective account.

P/L appropriation a/c represents owners capital accumulated through profits. Thus it can be treated a personal account.

We use the term special nominal accounts for such accounts, which seem to be nominal accounts by their name, but are not and whose balances are carried forward to the subsequent accounting periods.

Balance Sheet is prepared

Balance sheet is a position statement, showing the ledger balances in real, personal and special nominal accounts as at a particular point of time (the last day of the accounting period).

It is an abstract of the ledger account balances after finalising and capitalising profits

All accounting transactions affect the Balance Sheet

Every accounting transaction would affect two ledger accounts. The affected ledger accounts may be personal, real or nominal.

Since the personal or real account balances are shown in the balance sheet, we can say that those transactions which affect the personal or real accounts, affect the balance sheet.

The residue of the nominal account balances i.e. the net profit/loss is capitalised by transfer to capital account or to the profit and loss appropriation account thereby getting into the balance sheet.

Thus accounting transactions which affect nominal accounts can also be assumed to be affecting the balance sheet,

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