Business Resources P5 Essay Example

Financial Statements

Financial statement is a tool which allows the business to measure their finances. There are types of financial statements. These are profit and loss account, balance sheet and cash flow forecast. However in this question I will only be looking at two of the financial statements instead of the three and these are profit and loss account and balance sheet.

Profit and loss account

The profit and loss account is a valuable technique which shows the business how much it has made at the end of its financial year. For that reason this will help a future investor or financial institute to make a decision if it is worth taking the risk to invest in this business. In addition to that if it is a small business it will see how much profit has been made at the end of its financial year. This is a useful technique as it will help a business plan their finances and this can help them set a budget.

The structure of the profit and loss account is divided into two sectors. The top half of the profit and loss account starting from the sales to the gross profit is known as the trading account. The bottom half of the financial statement is the expenses and this will determine whether the business has made a y profit or loss at the end of the financial year.

Terms

Definition

Sales

Sales are the amount of revenue a business makes before deducting the cost of sales

Less inwards

Less inwards is the goods which are returned to the business and this is deducted from the sales.

Cost of sales

The cost of sales is the goods or services the business sells in order to make the sales for example the stock

Gross profit

The gross profit is the profit the business makes before the expenses and tax.

Expenses

The expenses are the cost the business occurs while making the sales for example the wages and salaries.

Net profit

The net profit is the profit the business makes after the expenses and the tax.

The order of the profit