Explanation of the components of Profit and Loss and Balance Sheet
Profit and Loss
A profit and loss allows a business to work out whether they have made a profit or loss after taking away all the expenses from their sales revenue.
Purpose and Use: The purpose of a profit and loss account if correct is to be able to show how much profit or loss a business has/ will make. It includes the sales, costs and profit over a set amount of time normally yearly. Its use is that it could help measure the performance of a business and with possible decision making in the long term on perhaps decisions like whether to take trade credit or not.
Trading account and calculations of gross profit: This ...view middle of the document...
Commission received: This is where a business can receive commission sales as well as its normal sales.
Transfer of net profit to balance sheet: Tax gets taken away from the net profit which is the % of the profit that goes to HR and gives net profit after the tax is deducted. A way a business can use its profit is by giving a proportion of it to the businesses shareholders through dividends or be taken out as drawings if the business is a partnership or sole trader. However in the long term most net profit will end up being put back into the business which will be known as retained profit.
A balance sheet works out the net worth of a business by working out what the business owns against what it owes.
Purpose and Use: This is a part of a businesses net worth at a specific moment in time usually at the end of a financial year, it is a summary of a businesses assets (owing's) and liabilities (ownings) which overall informs the value of a specific business.
Presentation: This can be shown in a horizontal or vertical format however vertical is usually the mostly common style which is presented as follows:
* Intangible assets
* + fixed assets
* + current assets
* - current liabilities
* - long-term liabilities
* = net assets
The above is the beginning part of a balance sheet that works out the net profit. The second part of the balance sheet takes into consideration how the money that is left from the first part has been financed that shows the capital employed:
* Owners capital
* + retained profit
* - capital employed
For a balance sheet to be able to balance it is important that the net assets are = to the capital employed.
Order of performance: This is where a business will list its fixed assets in order of performance to make the asset that stays in the business for the longest...