Introduction to the worksheet

Abstract

In Chapter 3 we discussed the question of how we measure what a business is worth at a particular point in time by using the balance sheet, whilst in Chapter 4 we discussed the measurement of the profit for a period of time through the use of the profit and loss account. We also indicated that the profit could be measured either using the profit and loss account or from the increase in wealth over a period of time. Because of the complexity of most business organizations and the number of transactions involved we need to have a system from which the details for inclusion in the balance sheet and profit and loss account can be drawn. This system also needs to have some built-in checks and balances to ensure as far as possible that transactions are not omitted and to allow us to trace back to the original source any errors that are identified. To cope with these and other demands a form of recording known as double-entry book-keeping was developed. This system is based on a rule known as the principle of duality. (see Key Concept 3.10) This principle was discussed in some detail in Chapter 3, and it was further exemplified in our discussion of the balance sheet equation which we defined as