Chapter 4, End of Chapter, Questions, Exercise 10

Financial statements are the financial reports prepared in a standard format to depict the financial performance of a business during an accounting period to the management and other related parties.

A balance sheet contains the information that helps to determine a company's financial position, which is depicted under three heads; namely, assets, liabilities, and stockholders' equity. The accounts represent under the balance sheet of the company are generally real accounts, which are also known as permanent accounts. The accounts that are not closed at the end of the accounting year are permanent accounts. Their balances are carried forward from one accounting period to another. In permanent accounts, the ending balance of the last financial year becomes the beginning balance of the subsequent financial year.

The income statement comprises the summary of all the revenues and expenses of a company that have taken place in an accounting period and thereby helps to determine its net income. The accounts represented under the income statement of the company are generally nominal accounts, which are also known as temporary accounts. The accounts closed at the end of the accounting year are temporary accounts. Their balances are transferred to the retained earnings account at the year-end, and that makes the balance of these accounts equal zero. In temporary accounts, the beginning balance of each account is zero for each accounting period.