Balance Sheet Profit Loss
Profit and loss accounts and balance sheet
By law companies are expected to produce financial statements each year. These statements appear in Company Reports. There are two main financial statements:
1. The profit and loss account, and
2. The balance sheet.
1.The profit and loss (P&L) account.
This account can be updated regularly and shows how much profit or loss a business is making. A profit can be made in several ways, for example: * from trading, in the case of a High Street shop, i.e. buying and selling items such as clothes and furniture * from manufacturing, for example a company like Kraft produces chocolate bars and other foodstuffs. It buys in raw materials such as cocoa and sugar which it processes to make chocolate.
The top section of a P&L account is known as the trading account for a business that buys and sells items e.g. a bookshop. What is known as the gross profit is calculated by deducting cost of sales from turnover.
For example:
Turnover is sometimes referred to as sales revenue and is calculated by multiplying the number of items sold by their average price.
For example if the average price of a book is Rs.10.
The number of books sold is 10,000.
The turnover is therefore: 10,000 x Rs10 = Rs.100,000
Cost of sales is the cost of buying in the items to trade them. In this case the cost of buying the books. For example, the bookshop may buy in books at an average cost of £5 each. Assuming that it has bought in 1,000 books.
Cost of sales is therefore: 10,000 x Rs5 = Rs.50,000
Gross profit is calculated by deducting cost of sales from turnover.
Gross profit is therefore: Rs.100,000 – Rs.50,000 = Rs.50,000
We now need to examine the next part of the P&L account.
As well as the cost of sales, a business will incur overhead costs. These costs can not directly be related to each unit of output made or sold - hence the name overheads.
Overheads are typically referred to as expenses in the P&L account.
By law companies are expected to produce financial statements each year. These statements appear in Company Reports. There are two main financial statements:
1. The profit and loss account, and
2. The balance sheet.
1.The profit and loss (P&L) account.
This account can be updated regularly and shows how much profit or loss a business is making. A profit can be made in several ways, for example: * from trading, in the case of a High Street shop, i.e. buying and selling items such as clothes and furniture * from manufacturing, for example a company like Kraft produces chocolate bars and other foodstuffs. It buys in raw materials such as cocoa and sugar which it processes to make chocolate.
The top section of a P&L account is known as the trading account for a business that buys and sells items e.g. a bookshop. What is known as the gross profit is calculated by deducting cost of sales from turnover.
For example:
Turnover is sometimes referred to as sales revenue and is calculated by multiplying the number of items sold by their average price.
For example if the average price of a book is Rs.10.
The number of books sold is 10,000.
The turnover is therefore: 10,000 x Rs10 = Rs.100,000
Cost of sales is the cost of buying in the items to trade them. In this case the cost of buying the books. For example, the bookshop may buy in books at an average cost of £5 each. Assuming that it has bought in 1,000 books.
Cost of sales is therefore: 10,000 x Rs5 = Rs.50,000
Gross profit is calculated by deducting cost of sales from turnover.
Gross profit is therefore: Rs.100,000 – Rs.50,000 = Rs.50,000
We now need to examine the next part of the P&L account.
As well as the cost of sales, a business will incur overhead costs. These costs can not directly be related to each unit of output made or sold - hence the name overheads.
Overheads are typically referred to as expenses in the P&L account.