M3 Interpret the contents of a trading and profit and loss account performance of the organisation
M3
Interpret the contents of a trading and profit and loss account and balance sheet for a selected company explaining how accounting ratios can be used to monitor the financial performance of the organisation
.
Profit and Loss account.
The P&L will not tell you about the underlying health of the business, such as how much money it owes or is owed and what the value of its assets are. It shows how much money did business made in a year. It records two things sales and cost/turnover.
The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year.
There are different sections of P&L which include:
1. Sales- it is the total value of what you’ve sold during the period of time. The formula for it is price time’s quantity.
2. Cost of sales- these are the costs that are directly related to the sales you have made. It includes raw materials or stock you have purchased to resell. It may also include the cost of creating the items that you sold, including the cost of staff time if you are selling service.
3. Gross Profit - This is the sum of sales revenue minus cost of sales. It tells you how much profit you are making directly from your sales.
4. Operating Costs - These are all the other costs associated with running a business, such as the rent and rates on your premises, accountancy and legal fees, and depreciation. These costs cannot be directly linked to your sales and may not change very much even if your sales figures were to change significantly.
5. Net Profit - This is the gross profit minus the operating costs. This is almost the true profit of your business because it’s made up of all the income and all the costs. The net profit is transferred over to balance sheet.
Balance sheet
A balance sheet shows the value of a business on a particular date. A balance sheet shows what the business owns and owes. It is also used as a guide for
Interpret the contents of a trading and profit and loss account and balance sheet for a selected company explaining how accounting ratios can be used to monitor the financial performance of the organisation
.
Profit and Loss account.
The P&L will not tell you about the underlying health of the business, such as how much money it owes or is owed and what the value of its assets are. It shows how much money did business made in a year. It records two things sales and cost/turnover.
The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year.
There are different sections of P&L which include:
1. Sales- it is the total value of what you’ve sold during the period of time. The formula for it is price time’s quantity.
2. Cost of sales- these are the costs that are directly related to the sales you have made. It includes raw materials or stock you have purchased to resell. It may also include the cost of creating the items that you sold, including the cost of staff time if you are selling service.
3. Gross Profit - This is the sum of sales revenue minus cost of sales. It tells you how much profit you are making directly from your sales.
4. Operating Costs - These are all the other costs associated with running a business, such as the rent and rates on your premises, accountancy and legal fees, and depreciation. These costs cannot be directly linked to your sales and may not change very much even if your sales figures were to change significantly.
5. Net Profit - This is the gross profit minus the operating costs. This is almost the true profit of your business because it’s made up of all the income and all the costs. The net profit is transferred over to balance sheet.
Balance sheet
A balance sheet shows the value of a business on a particular date. A balance sheet shows what the business owns and owes. It is also used as a guide for