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 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

 Cost of goods sold

Purchases = 54,000 Purchases = 548,598

Closing inventory = 12,680 Closing inventory = 142,680
Cost of goods sold = ? Cost of goods sold = ?
 Gross profit

Purchases = 852,630 Sales revenue = 30 X 15000

Closing inventory = 410,000 Cost of goods sold = ?
Cost of goods sold = 442,630
? Gross profit = ?

Gross profit = £7,370

 Cost of goods sold

Each TV costs £1,000. The

shop bought 12 TVs. Their At the end of the month
total purchases was therefore there were 3 TVs left.
£12,000 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)

 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 2012
Sept30 Balance b/d 13,500 Sept30 balance b/d 9,000

Closing
Dr inventory a/c 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 2012
Sept30 Balance b/d 13,500 Sept30 Trading 12,000
2012
Sept30 Trading 13,500 2012
Sept30 balance b/d 9,000

Closing
Dr inventory a/c Cr
2012
Sept30 Trading 300
2012
The
We The balance
balance
need onofthe
to record thepurchase
sales
the a/ca/c
closing is is
inventory.Sept30 balance b/d 3,000
transferred
transferred
1. Debit theto tothe
thetrading
closing tradinga/c.
inventory a/c.
a/c with
1. 1.the
Debit
Debit the
valuethe sales
trading
of a/c
closinga/c (closing it)
inventory
2.2.Credit
Creditthe
thetrading
tradinga/c
purchase a/c
a/c (closing it)
 GROSS PROFIT
Trading a/c
Dr Cr

2012 - 2012 -
Sept30 Purchases 12,000 Sept30 Sales 13,500
Sept 30 Gross profit 4,500 30 Closing inventory 3,000

16,500 16,500

So our trading a/c looks like this

 NET PROFIT or LOSS
Profit & Loss
Dr Trading a/c Cr

2012 - 2012 -
Sept30 Rent 1,000 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 2012
Sept30 balance 1,000 Sept30 balance 800
2012 2012
Sept30 P&L a/c 1,000 Sept30 P&L a/c 800

Dr Wages a/c 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:
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