Trading Profit & Loss Accounts & Balance Sheets

Unit 2 – Finance

What are financial Statements? Financial Statements allow

businesses to measure their financial resources.

Public Limited Companies must publish their accounts so that investors can see how well they are doing and judge whether or not to by their shares on the stock exchange.

Two main types of financial statements you need: Profit e Loss and Balance Sheets.

Trial Balance

A summary of information from a business needed to produce financial statements. Trial Balance

Turnover 112364Purchases 83521Operating expenses 76325

There would be a much longer list if figures above just gives you an idea of how it will look

Trading Profit & loss Unit 2 - Finance

Profit & loss broken downThe profit and loss account is actually 3 different things all rolled into one! The names of these 3 sections are:

Trading Account Profit and Loss Account Appropriation Account

Business accounts are designed to provide users with information about its financial position and performance.

What is Profit & Loss?

To keep things simple, the Profit & Loss Account looks at all of the things that you have bought and sold across a year and takes away all of the costs you had to pay during that year.

  If you make more money than you have

to pay out you are in profit. If you pay out more than you make then

you are in loss.

The Trading Account The Trading Account is used to calculate

the amount of GROSS PROFIT that a business makes.

Let’s show you what this actually means. A business makes £35,000 sales in a

year. (sales revenue) But how much did the items sold cost the

business to buy? (cost of goods) Both pieces of information above are

needed to calculate profit.

Opening Stock, Purchases & Closing Stock Opening Stock – at the beginning

of the year a business has £1000 of stock.

The business Purchases an additional £12,000 worth of stock throughout the year to sell to customers.

At the end of the year there is £2000 of stock left unsold. This is know as the Closing Stock.

Cost of Goods Sold

The Cost of Goods Sold figure helps us to work out how much money the business has made from the buying and selling of stock during the year.

IMPORTANT FORMULA OPENING STOCK+ PURCHASES- CLOSING STOCK= COST OF GOODS SOLD

Gross Profit

How do you think we find the Gross Profit?

Sales – cost of goods sold = Gross Profit/loss

Gross Profit shows us the level of profit earned on the buying and selling of goods.

Actual Layout

£ £Sales/Turnover 35000

Cost of sales Opening Stock 1000Purchases 12000Less Closing Stock 2000 11000

Gross Profit 24000

Questions

Explain TWO ways in which the business could have increased his levels of Gross Profit?

(Hint. Think about suppliers and pricing)

THE PROFIT & LOSS ACCOUNT This figure you have calculated only

the GROSS PROFIT figure....we still need to take away all of the business expenses.

Can you think of what some of these expenses might be?

Operating expenses total £9275

Expenses

Expenses are extra costs that you have to pay for things that help you to operate as a business.

When we add all of these extra expenses together they suddenly bring down the amount of profit earned.

We take away all of the Operating Expenses from the Gross Profit to work out NET PROFIT.Gross Profit – Operating Expenses = Net Profit

Net Profit

£ £Sales/Turnover 35000

Cost of sales Opening Stock 1000Purchases 12000Less Closing Stock 2000 11000

Gross Profit 24000

Expenses (Overheads)Operating Expenses 9275Net Profit 14725

APPROPRIATION ACCOUNT The Appropriation Account is the

final section that we need to cover. Money is still owed to the

Government for taxes of £2500 Sole Traders & Partnerships pay

Income Tax Companies pay Corporation Tax As a profit has been made the

business also will pay out Dividends to its Shareholders of £3000

Trading Profit & Loss Account

£ £Sales/Turnover 35000

Cost of sales Opening Stock 1000Purchases 12000Less Closing Stock 2000 11000

Gross Profit 24000

Expenses (Overheads)Operating Expenses 9275Net Profit 14725

Taxation 2500

12225

Dividends 3000

Profit for the year 9225

£ £Sales/Turnover 35000

Cost of sales Opening Stock 1000 Trading Account Purchases 12000Less Closing Stock 2000 11000

Gross Profit 24000

Expenses (Overheads) Profit & Loss Account Operating Expenses 9275Net Profit 14725

Taxation 2500

12225 Appropriation Account

Dividends 3000

Profit for the year 9225

Trading Profit & Loss Account for six month ending 30th June 20xx

Balance Sheets Unit 2 Finance

What is a Balance Sheet? A Balance Sheet is a statement

which shows the assets (resources that are owned by the business), and liabilities (debts owed by the business) of a business. It is generally prepared at the end of an accounting period. The Balance Sheet is a ‘snapshot’ of the financial position of the business at a particular point in time, outlined on 1 piece of paper, and can be drawn up by any business.

Balance Sheet

The balance sheet is split into two parts: (1) A statement of fixed assets,

current assets and the liabilities (sometimes referred to as "Net Assets")

(2) A statement showing how the Net Assets have been financed, for example through share capital and retained profits.

Why does a Balance sheet “balance”?

Because EVERY financial transaction results in an equal change in assets and liabilities. Transaction Change In Assets Change in Liabilities

Stocks bought from suppliers on credit worth £5000

Stocks up £5000 Trade Creditors up £5000

Fixed Assets – Tangible Assets Fixed assets - are assets that the

business holds for more than 1 financial year.

They are not purchased to be resold They kept to help generate profit for

the business. Tangible assets fit under the title

fixed assets, these are the physical assets of the business.

Current Assets

Are cash and the assets that can be turned into cash in the near future

Current means in financial terms in the next 12 months.

Current assets are used for the day to day expenses of running a business, and are continually changing

Examples of current assets are Stock, Debtors, Savings, Bank

First section of the Balance Sheet

£ £ £Fixed Assets Tangible Assets 60000

Current Assets Stock 15000Debtors 42450Savings 100Bank 364

57914

Current Liabilities

Current liabilities are short term debts that the business has to pay with in an accounting period (usually 12 months)

Examples are Tax Liability - Corporation tax for the

current year Creditors – Money owed for goods of

services supplied on credit. Due within 1 year.

Working Capital & Net Assets

Current Assets – Current Liabilities

= Working Capital

Once you have calculated your working capital you can calculate your NET ASSETS

Total fixed Assets + Working Capital

= NET ASSETS

First & 2nd sections of the Balance Sheet

£ £ £Fixed Assets Tangible Assets 60000

Current Assets Stock 15000Debtors 42450Savings 100Bank 364

57914

Current Liabilites Creditors 31500Tax Liability 14256 45756

Working Capital 12158

Net Assets 72158

Financed By

Share Capital - The money raised through issuing shares

Share Premium – The difference between the original share value and the market value

Retained Profit - The revenue that is kept back by the business as a reserve.

The above 3 added together should amount to the same as the Net Assets

Allowing the Balance Sheet to ‘Balance’

£ £ £Fixed Assets Tangible Assets 60000

Current Assets Stock 15000Debtors 42450Savings 100Bank 364

57914

Current Liabilites Creditors 31500Tax Liability 14256 45756

Working Capital 12158

Net Assets 72158

Financed by Share Capital 70485Share Premium 842Retained Profit 831

72158

Balance Sheet as at 30th June 20XX