financial statements aim: to construct a profit & loss account objectives: use appropriate...
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Financial Statements
Aim:To construct a Profit & Loss Account
Objectives:•Use appropriate business terminology / concepts
•Know the importance of P & L
•Understand what goes in to a P & L
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Why produce a P&L?
•It is a legal requirement. Tax is paid on the profit.
•It summarises all the year’s transactions – as recorded in documents such as invoices.
•It shows the financial ‘health’ of the business.
•It is studied by managers, shareholders, banks, financiers and other relevant groups of people.
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Profit & Loss Accounts
£ £Sales 87,428
Less purchases 34,697
Gross profit 52,731
Less expenses:
Wages paid 14,625Rent & utilities 6,520postage & priniting 1,720Advertising 3,450Insurance 210Motor expenses 1,836
Net profit 24,370
Anon LimitedProfit & Loss account for the year ended 30 September
20x7
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Cost of goods sold
Purchases = 54,000Closing inventory = 12,680Cost of goods sold = ?
Purchases = 548,598Closing inventory = 142,680Cost of goods sold = ?
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Gross profit
Purchases = 852,630Closing inventory = 410,000Cost of goods sold = ?
Sales revenue = 30 X 15000Cost of goods sold = ?Gross profit = ?
Gross profit = £7,370
442,630
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Cost of goods sold
Each TV costs £1,000. The shop bought 12 TVs. Their total purchases was therefore £12,000
At the end of the month there were 3 TVs left. Therefore they sold 9 TVs
Therefore the cost of the goods sold was £9,000.Purchases = £12,000
Closing inventory = £3,000Cost of goods sold = £9,000
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£1,000 £1,500
Total TV sales (Sales revenue) = 9 TVs at £1,500 each Costs of goods sold = 9 TVs at £1,000 each
Gross profit = (sales revenue – cost of goods sold)
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The accounting method...
At the end of each period (month) the accounts should be closed-off ready to start a fresh the next month.
Sales a/cDr Cr Purchase a/cDr Cr
Closing inventory
a/cDr Cr
2012Sept30 Trading 13,500
2012Sept30 Trading 3,000
2012Sept30 Trading 12,000
We are going to ‘link’ all these accounts with the
‘trading account’
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The accounting method...
At the end of each period (month) the accounts should be closed-off ready to start a fresh the next month.
Sales a/cDr Cr Purchase a/cDr Cr
Closing inventory
a/cDr Cr
2012Sept30 Trading 13,500
2012Sept30 Trading 3,000
2012Sept30 Trading 12,000
These balances will appear on the trading account. thus these 3
accounts are now closed.
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GROSS PROFIT
Gross profitTrading a/c CrDr
2012 - Sept30 Purchases 12,000
2012 - Sept30 Sales 13,500 30 Closing inventory 3,000
16,500
Sept 30 Gross profit 4,500
16,500
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NET PROFIT or LOSSProfit & LossTrading a/c CrDr
2012 - Sept30 Rent 1,000
2012 - Sept30 Gross Profit 4,500
4,500
Sept 30 Lighting 800
4,500
Sept 30 Wages 2,000 Sept 30 Net profit/loss 700
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NET PROFIT or LOSS
The expense accounts will now be closed-off.
Rent a/cDr Cr Lighting a/cDr Cr
Wages a/cDr Cr
2012Sept30 P&L a/c 2,000
2012Sept30 P&L a/c 800
We are going to ‘link’ all these accounts with the
‘trading account’
2012Sept30 P&L a/c 1,000
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The P&L Statement£ £
Sales 13,500Less cost of goods sold:Purchases 12,000Closing inventory (3,000)
= 9,000 (COGS)
Gross profit 4,500
Less expenses:Rent 1,000Lighting 800Wages 2,000
Net profit 700