Profit and Loss Essay

Profit and loss accounts, balance sheets Profit and loss accounts, balance sheets Two of the nigh in-chief(postnominal) financial statements for a line of reference book atomic number 18 the Profit and outlet sum up, and the residuum planing machine. The Profit and Loss Account projects the profit or loss of a course over a given blockage of beat e. g. 3 months, 1 course, etc. In contrast, the Balance canvas tent is like a mental picture taken at an instant in time giving a picture of what the subscriber line owns and what the stock owes at that moment in time. As we shall see it will always balance because what the duty owns is financed by what the business owes. The Profit and Loss (P&L account)Net profit takes account of other sources of income and expenditure that are non involved in normal operations e. g. interest paid on loans and interest received on having a positive balance in a bank account. Turnover is the value of gross revenue suffer in a tradi ng period. It is some eferred to as sale revenue and is calculated by the mediocre price of items change x the number sold. Cost of gross revenue calculates the direct costs of manufacturing items, or buying in items to sell them on. Expenses are the overhead costs of running a business. These overheads cant be tied down to particular cost units. For example, it would be very difficult to calculate what division of the estrus cost of a pen factory can be allocated to just one pen. The Balance Sheet is a statement showing the assets, liabilities and owners capital of a business at a particular Downloaded from The100 Edition http//www. he100. co. uk moment in time, for example the year end. The Balance Sheet balances because the assets that a business possesses at a specific time leave been financed either through the preparation of capital by the owners or by the creation of external liabilities measure out of assets = Value of Liabilities Value of proprietors capital. There are a number of things that we can see from spirit at a balance sheet, for example 1. The Net Assets of the business, i. e. the difference between the value of the assets and the value of the liabilities.A growth in crystalise assets tends to indicate a growing business. 2. How solvent the business is. In other words, does it have equal assets that are short term, and hence easily converted into cash, to pay any pressing short-term liabilities. subject field Example A typical balance sheet will be set out in the next way (note that we use two columns. The first column is for minor calculations, the second column is for high-and-mighty totals) Balance Sheet of Superior Traders, as at 31st December 2004 Fixed assets consist of those items that are kept within the business to create wealth over a period of time e. . machinery, equipment, vehicles, computers, etc. genuine assets are used in the short period to generate income for a business. For example, in a manufacturing compa ny like Kraft, stocks would represent products that have already been made and are waiting to be sold onto retailers. Typically stocks will be sold on credit for periods of one month, two months, or 3 months. Retailers buying stocks on credit from Kraft would become Krafts debtors. At the end of the credit period they will pay up in the form of cash, enabling Kraft to buy more(prenominal) raw materials to create further stocks.Creditors due within one year are the sums that a business owes money to in the short period otherwise known as contemporary liabilities. Net new assets is a measure of how solvent or liquid a business is. Many businesses need to have working capital. Working capital is calculated by subtracting current liabilities from current assets Working capital = Current assets Current liabilities Note that the figure for net current assets appear close in the centre of a balance sheet, and is a figure that many people will control at first to break up on the so lvency of a business.Total assets current liabilities is a sum that appears in the balance sheet precisely doing what the title suggests. Creditors due after more than one year shows the coherenter term liabilities of the bsiness. Total net assets is calculated by taking away all the liabilities (both current and ample term) from all of the assets (both current and long term). Shareholders funds shows the value of the shareholders capital in the business. It will always be the same value as the total net assets and it balances the account. Downloaded from The100 Profit and loss accounts, balance sheets Profit and loss accounts, balance sheetsTwo of the most important financial statements for a business are the Profit and Loss Account, and the Balance Sheet. The Profit and Loss Account shows the profit or loss of a business over a given period of time e. g. 3 months, 1 year, etc. In contrast, the Balance Sheet is like a photograph taken at an instant in time giving a picture of w hat the business owns and what the business owes at that moment in time. As we shall see it will always balance because what the business owns is financed by what the business owes. The Profit and Loss (P&L account) One of the most important objectives of a business is to make a profit.The P&L account shows the extent to which it has been successful in achieving this objective. Companies are expected to forbear their P&L accounts in certain formats. Typically the P&L account will show the revenues received by a business and the costs involved in generating that revenue. In simple monetary value Revenues Costs = Profits. A typical P&L account will look like the following Case Study P&L Account for Superior Traders as at 31/12/2004 You can find out the gross profit of a business by deducting cost of sales from turnover ? 100,000 ? 50,000 = ? 0,000 You can find out the operating profit by deducting the expenses from the gross profit ? 50,000 ? 30,000 = ? 20,000 You whitethorn also come across the term net profit. Operating profit is earned from carrying out a businesses normal operations e. g. producing confectionery, or selling Christmas cards. Net profit takes account of other sources of income and expenditure that are not involved in normal operations e. g. interest paid on loans and interest received on having a positive balance in a bank account. Turnover is the value of sales made in a trading period.It is sometimes referred to as sale revenue and is calculated by the average price of items sold x the number sold. Cost of sales calculates the direct costs of manufacturing items, or buying in items to sell them on. Expenses are the overhead costs of running a business. These overheads cant be tied down to particular cost units. For example, it would be very difficult to calculate what fraction of the heating cost of a pen factory can be allocated to just one pen. The Balance Sheet is a statement showing the assets, liabilities and owners capital of a business at a particular Downloaded from The Times 100 Edition oment in time, for example the year end. The Balance Sheet balances because the assets that a business possesses at a specific time have been financed either through the provision of capital by the owners or by the creation of external liabilities Value of assets = Value of Liabilities Value of Owners capital. There are a number of things that we can see from looking at a balance sheet, for example 1. The Net Assets of the business, i. e. the difference between the value of the assets and the value of the liabilities. A growth in net assets tends to indicate a growing business. Creditors due within one year are the sums that a business owes money to in the short period otherwise known as current liabilities. Net current assets is a measure of how solvent or liquid a business is. Many businesses need to have working capital. Working capital is calculated by subtracting current liabilities from current assets Working ca pital = Current assets Current liabilities Note that the figure for net current assets appear almost in the centre of a balance sheet, and is a figure that many people will look at first to check on the solvency of a business.Total assets current liabilities is a sum that appears in the balance sheet simply doing what the title suggests. Creditors due after more than one year shows the lifelong term liabilities of the bsiness. Total net assets is calculated by taking away all the liabilities (both current and long term) from all of the assets (both current and long term). Shareholders funds shows the value of the shareholders capital in the business. It will always be the same value as the total net assets and it balances the account. Downloaded from The Times 100 Edition.