Account Definations

7/31/2019 Account Definations

1/7


2/7

Loancapital (which is simply a grand name for long term loans)

ReservesCash(or) Money Can be in the petty cash tin in the office or at the bank.

Current Asset

Assets which are expected to be used up and replaced within one year. Sometimes referred to as short term assets.They

can be : stocks of finished goods or raw materials or partially finished good known as work in progress. This amount is

also referred to as closing stock and can be found in the Trading account section of the Profit and loss Account. It is

important to remember that Closing stock appears both in the Balance sheet and in the Profit and Lossaccount.amounts owed to the business from its customers and known as Debtors. Customers come in two varieties:

Cash customers which pay for goods at the time of sale

Credit customers which pay for goods at a later date. It is from these sales that debtors arises i.e. amounts owed from

customers.

This amount is usually shown net of Doubtful debts(which means having the amount of doubtful debts deducted from

the total figure for debtors) The deduction for Doubtful debts is usually an estimate and is known as

a Provision (meaning estimate) for doubtful debts. It represents amounts under dispute with customers or amounts

which customers are having difficulty in paying because of cash flow problems. Income arising from these amounts is

therefore considered doubtful.

amounts paid in advance (at the end of the accounting year) of goods and services received and referred to

asPrepayments

Prepayments are shown as added to debtors.

cash and bank

Current Liability

Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and

services is due at a date later than the date of sale. Current liabilities can be:

Trade creditors, which is the name we give to amounts owed to suppliers.

Accruals, which is the name we give to amounts still owed at the year end and not yet recorded in the books of account

Proposed items such as Dividends proposed, which means amounts the business promises to pay in the coming year.

Payable items such as Tax payable which is payable within the coming year.

Overdraft, which is amounts owed to the bank.

Depreciation Is the measure of wearing out of a fixed asset. All fixed assets are expected to wear out, become less

efficient and to get "tired". Depreciation is calculated as the estimate of this measure of wearing out and is a charge in

theProfit and loss Account. Accumulated Depreciation is the total depreciation charges to date deducted from the cost

of the fixed assets to show Net Book Value in the Balance Sheetlearn more about depreciation

Watch a car becoming more worn out over time When you have finished you need to press escape and return.

Drawings

Assets withdrawn from the business by the owners. These assets are usually cash but can be any asset withdrawn. In

company accounts the withdrawal of assets by the owners is either called :

salaries if it is payment for work done by the owner or dividends if it is for a share of the profits
http://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#loanhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#loanhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#reserveshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#reserveshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#prepaymenthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#prepaymenthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#prepaymenthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defdep1.htmhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defdep1.htmhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defdep1.htmhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/mini.gifhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/mini.gifhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/mini.gifhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defdep1.htmhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#prepaymenthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#reserveshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#loan


3/7

Fixed Assets

Assets used within the business and not acquired for the purposes of resale. Examples include:

Land and buildings

Plant and machinery, such as knitting machines and cup making machinery

Fixtures and fittings, such as light fittings and shelving

Motor vehicles, such as vans and cars.Fixed assets must be shown at original cost(purchase price) or valuation.

Valuation is preferred in the case of assets which have changed significantly in value since original purchase. For

example the current value of land and buildings can be quite different from the original cost.

Accumulated Depreciation must also be shown, which is deducted from cost (or valuation) to give net book value

Goodwill

comes in two flavours: Inherent goodwill, which is supposed to reflect the reputation and other positive characteristics

of the business which are all difficult to put a value on. This type of goodwill should not appear on the Balance Sheet

Purchased goodwill, which is the excess of purchase price over fair value of the net assets of the business acquired by

the purchaser.

Legal framework

The law controls what kinds of books, records and systems of internal controls that must be maintained by companies

which are subject to an annual examination by external auditors. You will learn much more about these in your studies.

Long term Liability

Amounts owed to someone else which are payable after one year. Examples include:

Long term loans

Debentures , which are long term loans secured on the business assets. This means if the business fails to repay back the

loan on time the business assets are at risk.

Net current assets

Sometimes referred to as working capital, this is the difference between total current assets and total current liabilities

and is what finances the business on a day to basis.

Net Assets

Is the difference between the total assets and total liabilities.

Profit

There are many types of profit:

Cash surplus, which is the difference between receipts and payments.

Taxable profit, which is the business profit adjusted for tax purposes.

Accounting profit, which is the difference between:

Income received or receivable and

Expenditure paid or payable within anaccounting period Often referred to asNET Profit
http://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20book%20valuehttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20book%20valuehttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20book%20value


4/7

Accounting profit is calculated using theaccruals or matching concept. Which means that the total income includes not

only cash received but also amounts owed by credit customers (debtors) for sales made within theaccounting period.

The total costs incurred to achieve these sales include not just actual payments made , but also amounts still owing to

suppliers. Accounting profit is normally referred to asNet Profitwhich isGross profitlessExpenses.

Reserves

Amounts retained in the business and not distributed to owners. Reserves can be:

Profits made and not passed on to owners. These are some times known as retained earnings.

Capital reserves which can not be passed on to owners and represent the perceived increase in valuation of some fixed

assets.

Shares

Amounts invested in a company by its owners. Owners of companies are called shareholders

The profit and loss account words

Accounting Period

Is the period under examination and usually refers to a year. We therefore refer to aProfit and loss Accountfor the yearended so and so or aBalance Sheetas at so and so.

Accruals or Matching concept

Is the reason why net profit made is not the same as the cash surplus generated. This is a critical concept for you to

understand. It is a fundamental concept upon which the accounts are prepared. You will learn in your studies that profit

is not cash for a number of reasons:

because of applying the accruals concept to preparation of accounts. This is where we deduct from sales the amounts

we have incurred to achieve those sales - WHETHER WE HAVE PAID FOR THEM OR STILL OWE FOR THEM is irrelevant. In

other words we count all costs incurred including those still owing to trade creditors at the end of the year. The costs

deducted in the accounts will therefore be greater than the actual cash payments made where amounts are still owed athe end of the year. Similarly the sales figure is not made up of cash received from customers but is made up of cash

received together with that still to be received.

because of accounting fordepreciationwhich is a deduction against profits for the measure of wearing out of afixed

asset and therefore does not involve a cash payment

because of the way we valueclosing stockwhich can be by using average unit costs, the last unit costs or the earliest

unit costs. None of these methods reflect the actual flow of cash because they are all estimates only. You will learn that

this is where we consider FIFO (first in first out) and LIFO (last in first out) valuations of closing stock.

Expenses

Referred to as expenditure and including examples such as:

advertising

rent and rates

wages and salaries

travelling expenses

light and heat
http://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#matchinghttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#matchinghttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#matchinghttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#depreciationhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#depreciationhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#depreciationhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#fixed%20assetshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#fixed%20assetshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#fixed%20assetshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#closing%20stockhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#closing%20stockhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#closing%20stockhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#closing%20stockhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#fixed%20assetshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#fixed%20assetshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#depreciationhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#net%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#matching


5/7

Office Expenses

Miscellaneous Expenses

bank interest

loan interest

depreciation

Provision for doubtful debts . This represents an estimate of amounts customers have difficulty paying due to their

cash flow problems. This figure will be deducted from the profit in theProfit and loss Account and will also be deducted

from theDebtors figure in theBalance Sheet.

bad debts written off

Amounts owed by customers that cannot afford to pay because they have gone into liquidation. These amounts need to

be deducted from the profit in the Profit and Loss Accountand also from theDebtors figure which is found in

theCurrent Assets section of theBalance Sheet.

accruals and prepayments.

Accruals are amounts unaccounted for yet still owing at the year end . Estimates need to be made and then added to the

expenses deducted in theProfit and Lossaccount. This amount also needs to be added toTrade Creditors in the Currentliabilities section of the Balance Sheet . Prepayments are amounts paid for by the business in advance of goods and

services received. These amounts need to be deducted from expenses in theProfit and Loss account and will also appear

in theCurrent Asset section of theBalance Sheetalong withDebtors.

Gross Profit

Is calculated by deducting Cost of Sales(sometimes referred to as Cost of goods sold) from sales. Cost Of Sales is

calculated by taking:

Opening stock, which is the value of stock which exists at the beginning of theaccounting period

Plus Purchases of goods for resale, made during theaccounting period.

One common mistake made by students is to confuse purchases with stocks.

Purchases of stocks are dealt with through the purchases account and not through the Opening and closing stocks.

Less Closing stock, which is the value of stock which exists at the end of theaccounting period In other words, it is the

value of goods purchased during the year and in stock at the beginning of the year, less those items sold during the year

This is the figure which also appears in the balance sheet as stocks and can be found in the current assets section.

Historic cost

The method used for preparing accounts which estimates the actual purchase price of all items purchased. This is as

opposed to the alternatives which could be to use instead the:

cost of replacing items when they are sold or disposed of .Known as the Replacement cost or net realizable value

income expected if items were sold. Known as the Realization cost

Net Profit

Sales lesscost of saleslessexpenses= net profit.

Sales less cost of sales =gross profit.

Therefore Net Profit = gross profit less expenses.
http://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#creditorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#creditorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#creditorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#saleshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#saleshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#cost%20of%20saleshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#cost%20of%20saleshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#cost%20of%20saleshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#gross%20profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#expenseshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#cost%20of%20saleshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#saleshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#creditorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#currentassethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20losshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#balsheethttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#debtorshttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#profit%20and%20loss


6/7

In other words Net Profit represents the surplus of sales made over expenditure during the accounting period. If a defici

is made(i.e if expenditure is greater than sales) then this results in a net loss and not a net profit.

Profit and Loss Account

Shows what net profit or loss the business has made within anaccounting periodafter deducting all expenditure from

the income. A net profit is earned if total expenditure is less than the sales figure. A net loss is made if it is greater.

Comes underneath theTrading Account

Sales

Income received or receivable for theaccounting period. Sometimes referred to as Turnover.It represents the sales

value of goods and services made to customers during the year.

Trading account

Shows whatGross Profitthe business has made within anaccounting periodIt comes on top of theProfit and Loss

Account

By using Ratio Analysis the words in the Balance Sheet and Profit and Loss Account can tell us something about how wel

the business has performed.

Net profit is used in the Net Profit ratio (Ratio 3 below) and can therefore tell us something about the profitability of thebusiness.

The higher the figure the better the business is able to control its expenses.

In other words the bigger the ratio the better.

This means that more profit is made on the goods sold.

Other common ratios are also listed below .

Profitability

1 Return on Capital Employed = Profit x 100 = %

Capital

2 Gross Profit Ratio = Gross Profit x 100 = %

Sales

3 Net Profit Ratio = Net Profit x 100 = %

Sales

Efficiency Ratios

4 Stock Turnover Ratio = Cost of Goods Sold = No of times

Average Stock

5 Fixed Assets Turnover Ratio = Sales = No of times

Fixed Assets at NBV

6 Debtor Collection Period = Average debtors x 365 = No of days

Sales x 52 = No of weeksx 12 = No of months

7 Suppliers Payment Period = Creditors x 365 = No of days

Purchases x 52 = No of weeks

x 12 = No of months

8 Asset Turnover = Sales = No of Times

Capital Employed
http://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Trading%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Trading%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Trading%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Gross%20Profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Gross%20Profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Gross%20Profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Profit%20and%20Loss%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Profit%20and%20Loss%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Profit%20and%20Loss%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Profit%20and%20Loss%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Profit%20and%20Loss%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Profit%20and%20Loss%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Gross%20Profithttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Accounting%20Periodhttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#Trading%20Accounthttp://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/mscproj/defn.htm#accounting%20period


7/7

Liquidity Ratios

9 Current Ratio = Current Assets = Expressed as a

Current Liabilities Factor

10 Quick or Acid Test = Current Assets - Stock [Also expressed as a Factor]

Current Liabilities

Investment Ratios

11. Gearing = Preference Shares + Long Term Loans X 100%

Shareholders funds + Long Term Loans

A Note of caution:

Ratio Analysis is all about comparing one set of ratios with another.

This can mean comparing one year with another, or comparing the performance of one company with another or with

its budgets.

To achieve greater confidence in the conclusions you draw, you really need to compare more values than just two. You

also need to bear in mind that there is some flexibility in the accounting treatments adopted by accountants when

preparing the financial statements and so differences observed in performance might in part be due to differences in th

way items have been treated in the accounts rather than differences in performance.

Now test your understanding by attempting to calculate the net profit % from our own figures.

First you need to know whether to examine the trading, profit and loss account or the balance sheet.If you make a mistake you may return here, for another try, by pressing your internet return button. You must return to

this point in any event if you wish to take a peep at the answer

The answers to the net profit ratio

Net profit ratio = net profit x 100% = 200 = 10%

sales 2000

This means that the business makes a net profit of 10% on it's sales. In other words it makes a profit of 10p for every 1

of sales.

These figures can be found on the profit and loss account.

Documents

Account Definations