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

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.

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

Cost of goods sold

Purchases = 54,000Closing inventory = 12,680Cost of goods sold = ?

Purchases = 548,598Closing inventory = 142,680Cost of goods sold = ?

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

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

£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)

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’

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.

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

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

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

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