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What happens if a company pays all of its expenses during the year?

Hey all,

I was wondering, if a company begins operating on Jan 1 and ends its years on Dec 31, and hypothetically pays off all of its expenses on Dec 31, would it even require an income statement?

I’m saying this because as we know all expenses on the income statement are accrued but not paid for yet, so what would happen if they were all paid?

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You got it wrong, i fear. Expenses on the income statements are included regardless of whether they were paid or not. Their “paid” status is reflected in the balance sheet - trade payables.

Darn. Thank you for your reply Sir. How would you be able to tell if they were paid or not if it was your first year of business? Second year I guess it becomes easy as you can just check by changes in accounts in the balance sheet. What about the first year?

When you purchase something costing 10 currency units (to be expensed) you do an accounting entry say Debit expense in PL 10/ Credit Trade Payable 10. Then if you pay partially the supplier you book Dr Trade Payable 5 / Cr Cash 5. At any point of time after that (if there are no further transactions) if you look at the Trade Payables account it will have a balance of 5 (10 initial minus the 5 paid), which shows how much left to pay to that supplier you have. The income statement shows the expense of 10.

So Sir, does every expense on the I/S have a respective balance sheet account?

jad594 wrote:
So Sir, does every expense on the I/S have a respective balance sheet account?

Not exactly.

It depends on how you pay for things.

If you pay cash for an expense, there will not be a corresponding balance sheet account.  For example, if you pay your employees cash in full every day, then you’ll debit Wage Expense and credit Cash; there will be no account on the balance sheet specifically for wages.  If, however, you pay your employees in arrears (e.g., every two weeks), then you’ll have a Wages Payable (a liability) account on the balance sheet.

Simplify the complicated side; don't complify the simplicated side.

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This is excellent, thank you Sirs so much for that! Cleared a lot of confusion. 

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

I solved the problem you left me on the other thread!