02 Constructing Financial Statements PDF

The Trading Profit and Loss Account
Account
Businesses usually calculate their profit level by
creating a Trading Profit and Loss Account (TPL)
The TPL is produced because:
It is a legal requirement
It summarises all the year’s transactions
It shows the financial ‘health’ of the business.
Can be used to compare trade this year with trade last year
© Business Studies Online: Slide 1
The Parts of A T,P&L Account
Account
The document is made up of 3 sections which must be
completed in turn:
The Trading
The Trading Account
Account
Thiscalculates
This calculatesgross
gross The Profit
Profit && Loss
Loss
profit.It
Ittakes
takesthe
the The
profit. Account
Account
directcosts
direct costsof
of
productionaway
production awayfrom
from Thistakes
This takesthe
the The Appropriation
Appropriation
expenses(indirect
(indirect The
thesales
the salesrevenue
revenue expenses Account
costs)away
awayfrom
fromthe
the Account
costs)
grossprofit
gross profitto
to Thisshows
This showswhat
whatwill
will
calculatenet
calculate net profit
profit happento
happen toany
anyprofit
profit
thathas
that hasbeen
beenmade.
made. ItIt
usuallyrefers
usually refersto
to
dividendsand
dividends andtaxation
taxation
The Structure of a TP&L Account (1)
(1)
Need to calculate
how much it has Business
Trading Profit and Loss Statement
cost to make the Name and
goods that have For Lou Pole, year ending 31.08.04 Date
been sold
£ £
Value of stock Sales 400,000
owned at the
start of the year LESS Cost of sales
Opening Stock 100
Sales, the
Value of raw Purchases 100,000 money from
materials selling goods
purchased 100,100
during the year Less Closing Stock 100
Value of stock 100,000
left at the end Gross profit 300,000
of the year.
This will be Calculated by
next year‛s subtracting
OPENING cost of sales
STOCK from sales © Business Studies Online: Slide 3
The Structure of a TP&L Account (2)
Expenses £ £
listed and Gross profit 300,000
a total
given LESS Expenses Calculated by
subtracting
Salaries 75,000 expenses from
Rent 25,000 Gross Profit
Other 14,000
Total expenses 114,000
Calculated
Net profit 186,000 by
subtracting
tax from
Corporation Tax 74,400 net profit
Profit after tax 111,600
Dividends 5,580
Retained profit 106,020
Calculated by subtracting dividends.
This is the amount of money that will be
kept in the business © Business Studies Online: Slide 4
Different Types of T,P & L Accounts
Accounts
The T,P & L Accounts of businesses will differ according
to their legal structure
Companies (Ltds & Plcs) are subject to more legal
constraints:
The Accounts Of Incorporated Businesses
Accounts must be published
Accounts usually show figures for 2
years
They must show how the profit is being
used (Appropriation Account)
The Limitations Of T,P & L
L
The trading, profit & loss account
is a historical view of the business
It does not tell us what will happen
in the future – although it may help
to identify trends
Businesses may “manipulate”
accounts in order to reduce their
tax liabilities, or to deter a potential
takeover
Working Capital
Capital
Working capital refers to the materials that a business
needs in order to make the products that it sells
Without working capital a business would be unable to
operate
It is the working capital that produces profit and as such
it is referred to as an investment
However, working capital items are NOT intended to be
kept by the business
How Money Works In Business
Business
Money constantly goes round a business in a cycle
This can be shown as follows:
The Speed of the Working Capital Cycle
Cycle
If the amount of cash at the end of the cycle is bigger
than that at the start then a firm will make a profit
How much profit depends upon how quickly they can
get round this cycle.
How quickly it can get round depends on two factors:
Speed of The
Working Capital Cycle
Creditors Debtors
• People a business owes money to. • People who owe the business money.
• They speed up the cycle • They slow down the cycle.
Calculating the Working Capital
The working capital of a firm is calculated as follows:
Working Capital = Current Assets – Current Liabilities
Where:
Current Assets =
Anything a business owns, which it intends to sell
Examples include raw materials, stock, debtors and cash.
Current Liabilities =
Anything that a business owes, which must be paid within the
next 12 months
Examples include creditors, overdraft and dividends.
This calculation is part of the BALANCE SHEET
What is a Balance Sheet?
Sheet?
A Balance Sheet is a financial statement which
shows the ASSETS, LIABILITIES and CAPITAL of a
business on a particular date
Assets
Assets Capital
Capital
Areitems
Are itemsowned
owned Isthe
Is themoney
money
bythe
by thebusiness
businessor
or investedby
invested bythe
the
owedto
owed tothe
the ownersor
owners or
business
business shareholders
shareholders
Liabilities
Liabilities
Areamounts
Are amountsowed
owed
bythe
by thebusiness
business
The Key Principle of a Balance Sheet
Sheet
Businesses can only spend money that they either
have, or have borrowed then:
All Assets must equal All Liabilities
The Structure of a Balance Sheet (1)
(1)
Business
Name and Balance Sheet
Date For A.B.Hive LTD as at 31 December 2004
Fixed assets £
Fixed Assets £
are listed and
Building then added up.
170,000
Equipment 60,000
230,000
Current assets Current Assets

are listed and
totalled
Stock 30,000
Debtors 10,000
Cash at bank 5,000
45,000
(2)
Current Liabilities
listed and totalled
£ £ Calculated by
current assets –
Current liabilities current liabilities
Trade creditors 25,000
Net Current Assets 20,000
OR Working Capital
Long Term
Less Long Term Liabilities liabilities
Mortgage 45,000 are listed
and
Loan 5,000 totalled,
then taken
50,000 away
Calculated by fixed
assets + working
Net Assets capital – long term 200,000
liabilities © Business Studies Online: Slide 14
(3)
This section shows
FINANCED BY: where the money in the £
business has come
from.
Capital and reserves
Share capital 75,000
Profit and loss account 125,000
Total Capital Employed 200,000
This means that

£200,000 has been
invested in the business
Who Uses A Balance Sheet?
Both the balance sheet and the profit and loss
account show the ‘health’ of the business
All the stakeholders will be interested in the balance
sheet, but especially:
Shareholders
Customers
Suppliers
Employees
When used with the Trading Profit and Loss account
it shows how well the business is doing
The Limitations Of The Balance Sheet
Sheet
As soon as it is produced it is out of date
Fixed assets may be overvalued if they
are depreciated incorrectly
Businesses are not required to include
“intangible assets” such as brand
names. This can understate the value of
the company
Companies tend not to give a
breakdown of the figures – they just
quote totals
Differences In Accounts
Accounts
Different types of business produce different types of
accounts, due to legal requirements:
Unincorporated Incorporated
Businesses Businesses
Must produce Must publish
accounts for accounts
taxation purposes
Often abbreviated
Are usually in a so competitors get
simple format limited
information
T, P & L A/C will
not have an Usually show 2
Appropriation years figures
Account
Some terminology
is changed
Share Capital Vs Loan Capital
Capital
There is a big difference between share capital and
loan capital:
Share Capital Loan Capital
The total amount Is medium – longterm
invested in a business finance provided by:
by shareholders Banks
Note that share capital Debentures
is NOT the same as Other lenders
Shareholders funds
Share Capital Vs Shareholders Funds
Funds
Any profits invested in a business belong to it’s
shareholders
As such Shareholders funds can be calculated as:
Shareholders Funds = Share Capital + Reserves

02 Constructing Financial Statements PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

02 Constructing Financial Statements PDF

Uploaded by

Copyright:

Available Formats

The Trading Profit and Loss Account

Current assets Current Assets

This means that

Shareholders Funds = Share Capital + Reserves

You might also like