Question

Both capital and past profits are treated as liabilities due to

Answer 1

Answer:

Profit's Effect on the Balance Sheet

The profit or net income belongs to the owner of a sole proprietorship or to the stockholders of a corporation.

If a company prepares its balance sheet in the account form, it means that the assets are presented on the left side or debit side. The liabilities and owner's equity (or stockholders' equity) are presented on the right side or credit side.

Recall that the balance sheet reflects the accounting equation, Assets = Liabilities + Owner's Equity.

Example of Profit's Effect on the Balance Sheet

Assume that you own and operate a sole proprietorship. You provided a service to a client and earned revenues of $900 and had no expenses. One of the business assets (cash or accounts receivable) increased and the liabilities did not change. As a result, the owner's equity (the owner's capital account) increases.

Accountants do prepare an income statement or P&L to report the revenues and expenses, but the ultimate effect of a positive amount of profit or net income is to increase the business's assets and owner's equity.