Financial Statements Aim: To construct a Profit & Loss Account Objectives: All - Use appropriate business terminology / concepts Most - Know the importance of P & L Some - 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 account for the year ended 30 September 20x7 Profit & Loss Accounts Anon Limited Profit & Loss account for the year ended 30 September 20x7 £ Sales   87,428 Less cost of goods sold 34,697 Gross profit 52,731 Less expenses: Wages paid 14,625 Rent & utilities 6,520 postage & priniting 1,720 Advertising 3,450 Insurance 210 Motor expenses 1,836 Net profit 24,370 The P&L account should always state the name of the business and the accounting period for which it has been prepared.

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

Gross profit Gross profit = £7,370 Purchases = 852,630 Closing inventory = 410,000 Cost of goods sold = ? Sales revenue = 30 X 15000 Cost of goods sold = ? Gross profit = ? 442,630 Gross profit = £7,370

Therefore the cost of the goods sold was £9,000. 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 = £3,000 Cost 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)

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. Dr Sales a/c Cr Dr Purchase a/c Cr 2012 Sept30 Balance b/d 13,500 2012 Sept30 balance b/d 9,000 Closing inventory a/c Dr Cr 2012 Sept30 balance b/d 3,000 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. Dr Sales a/c Cr Dr Purchase a/c Cr 2012 Sept30 Balance b/d 13,500 2012 Sept30 Trading 12,000 2012 Sept30 Trading 13,500 2012 Sept30 balance b/d 9,000 Closing inventory a/c Dr Cr 2012 Sept30 Trading 300 2012 Sept30 balance b/d 3,000 The balance of the sales a/c is transferred to the trading a/c. Debit the sales a/c (closing it) Credit the trading a/c We need to record the closing inventory. Debit the closing inventory a/c with the value of closing inventory Credit the trading a/c The balance on the purchase a/c is transferred to the trading a/c. Debit the trading a/c Credit the purchase a/c (closing it)

GROSS PROFIT So our trading a/c looks like this Trading a/c Dr Cr 2012 - Sept30 Purchases 12,000 2012 - Sept30 Sales 13,500 30 Closing inventory 3,000 Sept 30 Gross profit 4,500 16,500 16,500 So our trading a/c looks like this

NET PROFIT or LOSS Profit & Loss Trading a/c Dr Cr 2012 - Sept30 Rent 1,000 2012 - Sept30 Gross Profit 4,500 Sept 30 Lighting 800 Sept 30 Wages 2,000 Sept 30 Net profit/loss 700 4,500 4,500

NET PROFIT or LOSS The expense accounts will now be closed-off. Dr Rent a/c Cr Dr Lighting a/c Cr 2012 Sept30 balance 1,000 2012 Sept30 balance 800 2012 Sept30 P&L a/c 1,000 2012 Sept30 P&L a/c 800 Wages a/c Dr Cr 2012 Sept30 balance 2,000 2012 Sept30 P&L a/c 2,000

The P&L Statement £ £ Sales 13,500 Less cost of goods sold: £ £ Sales 13,500 Less cost of goods sold: Purchases 12,000 Closing inventory (3,000) = 9,000 (COGS) Gross profit 4,500 Less expenses: Rent 1,000 Lighting 800 Wages 2,000 Net profit 700