To determine whether net profit is calculated on the balance sheet or another financial statement, let's break down the key aspects of financial statements.
1. Balance Sheet:
- The balance sheet provides a snapshot of an entity's financial position at a specific point in time.
- It shows the relationship between assets, liabilities, and shareholders' equity.
- It follows the fundamental accounting equation: Assets = Liabilities + Equity.
2. Income Statement:
- The income statement summarizes the entity's revenues and expenses over a specific period.
- It shows how much revenue (income) is earned and expenses are incurred, resulting in net profit or loss.
- Net profit (or net income) is calculated as: Net Profit = Total Revenue - Total Expenses.
Understanding these two financial statements, we can see that:
- The balance sheet focuses on what a company owns and owes at a certain date.
- The income statement focuses on the company’s performance over a period of time, reflecting revenues and expenses to determine net profit or loss.
Based on this information:
- Net profit is calculated through the process of recording revenues and subtracting expenses, activities that are reported on the income statement, not the balance sheet.
Hence, the correct answer is:
False
