1. The Purpose of Accounting
Profit and Loss

2. The core aim of any business is to survive
The core aim of any business is to survive. After this, if it is in the private sector it will want to make a profit. If it is in the public sector it may want to improve or expand the services it provides. Either way, it will need to control its finances. By collecting all the available financial information and recording it in various accounts a business can assess how well it is performing. This is important both for a business internally as well as externally.

3. Internally
Managers want to know how much they are selling, the level of their costs and the amount of profit they are making. From this information they can set budgets and performance targets to plan for the next trading year. An accountant can show managers where financial problems might be occurring within their company.

4. Externally
All businesses are legally required to keep records of their finances. A firm has to make its accounts available to the Inland Revenue (Corporation Tax), and Customs and Excise (VAT). The larger the business, the stricter the rules on what accounts it has to prepare.

5. Most business have to prepare a:
Trading and Profit and loss account
Balance sheet
Directors' report (describing the previous year's activities)
Limited companies also have to publish an annual report and final accounts because they have a separate legal identity.

6. Trading accounts and profit and loss accounts
At the end of every trading year a business prepares final accounts. These provide a financial summary of all their trading activity during the year.

7. The trading account shows the gross profit (or loss) that the company has made. Profit is the money made by the business and equals income minus expenses.

8. The profit and loss account shows the net profit (or loss) made
The profit and loss account shows the net profit (or loss) made. The Trading account and profit and loss account are often combined as one trading and profit and loss account so that both the gross and net profit can be displayed in the same set of accounts.

9. Profit and Loss : An example
The opening stock and purchases
are added together and then the
closing stock is subtracted to give
the cost of sales total.
This amount is then subtracted
from the turnover to give a gross
profit figure.

10. Profit and Loss : An example
The Account then continues:
It shows the rest of the annual expenditure which is the normal cost of running a business, plus Depreciation and bad debts. These are deducted from the gross profit to give the true profit: the net profit.

11. Turnover
Marked up price
Cost of sales
Opening stock
Purchases
Closing stock
Depreciation
Bad Debts
Gross Profit
Net Profit
Assets

12. Turnover
This is the total revenue or income from sales. In other words this is all the money a business receives from selling goods or services.

13. Net Profit
This is the gross profit minus expenses. For example: wages, rent, rates and advertising.

14. This is everything a firm owns.
Assets
This is everything a firm owns.

15. Marked up price
This is the price after the company has added its own profit margin on top of the price it cost to produce the goods.

16. This shows how much they have spent on
Cost of sales
This shows how much they have spent on
buying the goods at cost price before the firm has added its own profit margin.

17. Opening stock This is the value of stock remaining
unsold from the previous year.

18. Purchases Purchases are the amount spent on new stock
during the current year.

19. Closing stock Closing stock is the value
of stock left unsold this year
to be carried forward.

20. This is the loss of value through wear and tear.
Depreciation
This is the loss of value through wear and tear.

21. Bad Debts
This is the amount owed to a firm by a customer that will not be recovered (they will not get this money back).

22. This is the profit before the expenses are taken out.
Gross Profit
This is the profit before the expenses are taken out.