1. Financial Statements Aim: To construct a Profit & Loss Account Objectives: Use appropriate business terminology / concepts Know the importance of P & L Understand what goes in to a P & L

2. 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.

3. Profit & Loss Accounts ££ Sales 87,428 Less purchases 34,697 Gross profit 52,731 Less expenses: Wages paid14,625 Rent & utilities6,520 postage & priniting1,720 Advertising3,450 Insurance210 Motor expenses1,836 Net profit 24,370 Anon Limited Profit & Loss account for the year ended 30 September 20x7

4. Cost of goods sold Purchases = 54,000 Closing inventory = 12,680 Cost of goods sold = ? Purchases = 548,598 Closing inventory = 142,680 Cost of goods sold = ?

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

6. 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

7. £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)

8. The accounting method... At the end of each period (month) the accounts should be closed- off ready to start a fresh the next month. Sales a/cDrCrPurchase a/cDrCr Closing inventory a/c DrCr 2012 Sept30 Trading 13,500 2012 Sept30 Trading 3,000 2012 Sept30 Trading 12,000 We are going to ‘link’ all these accounts with the ‘trading account’

9. The accounting method... At the end of each period (month) the accounts should be closed- off ready to start a fresh the next month. Sales a/cDrCrPurchase a/cDrCr Closing inventory a/c DrCr 2012 Sept30 Trading 13,500 2012 Sept30 Trading 3,000 2012 Sept30 Trading 12,000 These balances will appear on the trading account. thus these 3 accounts are now closed.

10. GROSS PROFIT Gross profit Trading a/c CrDr 2012 - Sept30 Purchases 12,000 2012 - Sept30 Sales 13,500 30 Closing inventory 3,000 16,500 Sept 30 Gross profit 4,500 16,500

11. NET PROFIT or LOSS Profit & Loss Trading a/c CrDr 2012 - Sept30 Rent 1,000 2012 - Sept30 Gross Profit 4,500 4,500 Sept 30 Lighting 800 4,500 Sept 30 Wages2,000 Sept 30 Net profit/loss 700

12. NET PROFIT or LOSS The expense accounts will now be closed-off. Rent a/cDrCrLighting a/cDrCr Wages a/c DrCr 2012 Sept30 P&L a/c 2,000 2012 Sept30 P&L a/c 800 We are going to ‘link’ all these accounts with the ‘trading account’ 2012 Sept30 P&L a/c 1,000

13. The P&L Statement£ Sales13,500 Less cost of goods sold:  Purchases12,000  Closing inventory(3,000) = 9,000 (COGS) Gross profit4,500 Less expenses:  Rent1,000  Lighting800  Wages2,000 Net profit 700