Unit 3 Accounts & Finance

Financial Accounts

Learning Objectives

To be able to construct and ammend accounts from information given

To be able to identify and understand the main components of a profit and loss account (INCOME STATEMENT)

Business Accounts

• Accountants will draw up financial statements of the business at the end of each accouning period, usually one year

• For companies these are then sent to shareholders

Main Business AccountsThe Account What it shows

Income Statement (P&L)

Gross and net profit of the company. Details of how the net profit is split up

Balance Sheet Net worth of a company. This is the difference between what the company owns (assets) and what it owes (liabilities)

Cash-flow Statement

Where cash was recieved from and what it was spent on

The Income Statement (P&L)

• Records the revenue, costs and profit (or loss) of a business over a given period of time

• For internal users such as managers a detailed income statement will be produced perhaps once a month

• A less detailed one will appear in the published accounts, once a year

Key words

• Gross profit – equal to sales revenue less cost of sales• Sales revenue (sales turnover) – total value of sales

made during the trading period, selling price X quantity sold

• Cost of sales (cost of goods sold) – Direct cost of purchasing the goods that were sold during the financial year

• Dividends – share of profits paid to shareholders• Retained profit – profit left after all deductions,

including dividends

The Income Statement (P&L)Sales Turnover 3060

Trading Account(minus) Cost of sales (1840)

(equals) Gross profit 1220

(minus) Overheads / Expenses

(580)

Profit & Loss Account

(equals) Net profit (profit before tax and interest)

640

(minus) Interest (80)

(equals) Pre tax profits 560

(minus) Tax of 20% (112)

(equals) Profit after tax 448

(minus) Dividends to shareholders

200Appropriation

Account(equals) Retained profit 248

The income statement is usually split into three separate parts (3 separate accounts) and looks like this

In an exam they usually

just want you to do

this!

3 sections of an income statement

1. The trading account– Shows how gross profit (or loss) has been made

from the trading activities of the business– Not all sales are made in cash, sales turnover

figure is NOT the same as cash received by a business

– Sales turnover = selling price X quantity sold

3 sections of an income statement

2. Profit & Loss Account– This section calculates both the net profit and profit

after tax – Overheads are costs or expenses of the business that

are not directly related to the number of items made or sold (rent)

– Operating profit (net profit or profit before interest and tax) Profit made before tax but after cost of sales and overheads have been deducted

– Limited companies will also pay a corportaion tax before paying dividends

3 sections of an income statement

3. Appropriation Account– Final section which is not usually shown in

published accounts– Shows how profits are distributed between

shareholders and owners

Using Income Statements

• Can be used to measure and compare the performance of a business over time or with other firms

• Actual profit can be compared with expected profit levels

• Bankers and creditors of the business will need information when deciding whether to invest or not

Limitations

• Sometimes managers ‘window dress’ accounts to flatter the performance of the business

• ‘Quality’ of the business should also be taken into account – high profit resulting from the sale of assets might not be repeatable, low quality. Sales of exclusive product designs could be a continuos source of profit, high quality