A crucial component of any organization is cash. It is the company’s lifeblood and what enables it to run, pay its debts, and make investments. Cash is not always reflected on the income statement, though. An income statement is a type of financial statement that displays the revenues, costs, and profits of an organization over a specific time period. It offers a summary of a business’s financial performance over a certain time frame.
Since cash is neither an expense nor an income, it is not included on the income statement. Assets are listed on the balance sheet, and cash is an asset. The assets, liabilities, and equity of a firm are displayed on the balance sheet, which is a financial statement. The income statement gives a summary of a company’s financial performance over time, whereas the balance sheet provides a snapshot of its financial status at a certain point in time.
Non-cash transactions are those in which money is not changed hands. They involve exchanges of assets, services, or goods for other assets, services, or goods. Inventory exchanges, property trades, and equipment exchanges are examples of non-cash transactions. They could also involve the issuing of debt or ordinary stock.
The financial statements include information on non-cash transactions. For instance, the balance sheet would reflect the exchange of inventory for another asset as an increase in the asset received and a decrease in the inventory given up. The issue of common stock would be shown as a rise in equity on the balance sheet. A rise in liabilities would be shown on the balance sheet as a result of the issuing of debt.
In accounting, expenses or revenues that don’t require a cash transaction are referred to as non-cash items. Depreciation, for instance, is a non-cash expense that reflects the erosion of an asset’s value over time. Although it doesn’t involve the exchange of money, it is nonetheless listed as a cost on the income statement. A long-term contract’s revenue recognition is another non-cash item. Despite not involving the receiving of money, it is counted as revenue on the income statement.
Source papers for transactions are records that show a transaction occurred. Invoices, purchase orders, and receipts are a few instances of transaction source papers. The amount owing by a client for products or services received is shown on invoices. Purchase orders are records that list the goods a business has ordered from a supplier. Receipts are records that list the price a consumer paid for the goods or services they got. These records are used to create financial statements and record transactions in the accounting system.
In conclusion, because cash is neither an expense nor an income, it is not included on the income statement. Financial statements include non-cash transactions, which are defined as expenditures or income that do not involve the exchange of cash. In addition to being used to record transactions in the accounting system and create financial statements, transaction source documents serve as proof of a transaction. Any business owner or person involved in accounting or finance must comprehend these ideas.