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  1. 1. BGY Business studies week 11 <ul><li>Unit 21-Profit and Loss account </li></ul><ul><li>Unit 22-Balance sheet </li></ul>
  2. 2. Unit 21-Profit and Loss account <ul><li>Definition : Statement showing sales revenue over trading period, and all relevant costs generated to earn that revenue. </li></ul><ul><li>Stakeholders are interested : </li></ul><ul><li>1.Shareholders:for profitability </li></ul><ul><li>2.Government agencies: for taxes </li></ul><ul><li>3.Suppliers:Creditworthiness of co? </li></ul><ul><li>4.Potential shareholders/bankers: before investing </li></ul>
  3. 3. Uses of P & L account: <ul><li>Measuring and comparing success of co </li></ul><ul><li>Compare actual profits with expected </li></ul><ul><li>Obtaining loans </li></ul><ul><li>For planning </li></ul>
  4. 4. Determining profit <ul><li>P&L statement has three sections : </li></ul><ul><li>1.Trading account=to calculate Gross profit </li></ul><ul><li>2.Profit and Loss acc=to calculate Net/operating profit </li></ul><ul><li>3.Appropriation account=how have these profits been distributed? </li></ul><ul><li>1.Trading account </li></ul><ul><li>Aim: Did I make a profit/loss on my goods that I sold? </li></ul><ul><li>Aim: to calculate gross profit </li></ul>
  5. 5. 1.Trading account <ul><li>Formula: </li></ul><ul><li>Gross profit = Turnover/sales revenue - cost of goods sold </li></ul><ul><li>Consists of: </li></ul><ul><li>1.Turnover/sales revenue ( £ 200)= The no. of units sold(100) X Ave.selling price( £ 2) </li></ul><ul><li>-No vat included </li></ul><ul><li>2.Cost of sales </li></ul><ul><li>-records the expenses in making/buying goods you have sold.i.e . Manufacturing costs </li></ul><ul><li>-e.g. factory wages ,cost of material </li></ul><ul><li>-Does not include fixed costs e.g. rent, insurance </li></ul>
  6. 6. : <ul><li>2.Profit and loss account </li></ul><ul><li>Aim: Calculates overall net/operating profit made by co. </li></ul><ul><li>Formula: </li></ul><ul><li>Net/operating profit = Gross profit + all other income – Expenses </li></ul><ul><li>Consists of : </li></ul><ul><li>1.All other income –In any form (not from sales) </li></ul><ul><li>-e.g. rent ,commission and dividends received </li></ul><ul><li>2. Expenses- 1) Cash expenditure-on salaries, rent & rates 2) Non cash expenditure-depreciation </li></ul>
  7. 7. Net/operating profit should be: <ul><li>1.Increased with at least the level of inflation </li></ul><ul><li>2.Higher percentage of the capital employed ,than the cost of capital (interest rate) </li></ul><ul><li>3.Enough to give shareholders dividends ,and have money to reinvest in co (retained profit). </li></ul>
  8. 8. 3.Appropriation account <ul><li>Aim: To show how the net/operating profit is going to be: </li></ul><ul><li>1) Distributed –e.g. </li></ul><ul><li>-To government </li></ul><ul><li>-To shareholders (by Dividends) </li></ul><ul><li>2) Retained </li></ul><ul><li>i.e.-Reinvested in our company . </li></ul>
  9. 9. Additional information <ul><li>Title of the P&L should state : </li></ul><ul><li>Business name </li></ul><ul><li>Profit and Loss for the year ended </li></ul><ul><li>DD/MM/YY </li></ul><ul><li>Consolidated accounts: Records the aggregate position of the group as a whole e.g. holding co and its subsidiaries </li></ul>
  10. 10. H. Barker Ltd: Profit and Loss Statement for the year ended 31December 2003 47800 ( 22700) ======== 25100 ======== Trading account section Sales Turnover (Sales made in the current year) Less: Cost of goods sold (costs to produce the goods that have been sold) = Gross profit (47800-22700)
  11. 11. P&L-Continued 25100 (17000) 8100 1850 2300 3550 1200 ====== 8100 ====== Gross profit Less expenses : Wages and salaries Distribution Advertising Rent &bills Depreciation Net/ Operating profit (Final profit before paying Tax and Dividends)( 25100 -17000)
  12. 12. P&L-continued 8100 (2025) ====== 6075 ====== Operating profit Appropriation section (Section showing how this profit is to be divided: tax and dividends) Less :Taxation ( paid to the government) =Profit after tax
  13. 13. P&L-continued 6075 (4000) ====== 2075 ====== =Profit after tax Less: Dividends (paid to shareholders) = Retained profit (final profit or loss )
  14. 14. Unit 22 <ul><li>Balance Sheet </li></ul><ul><li>Def: An accounting statement showing: </li></ul><ul><li>1.Assets, liabilities and capital/finance of co </li></ul><ul><li>2.At a precise point in time (usually last day of acc. year) </li></ul><ul><li>A – L=F/C (must balance ) </li></ul>
  15. 15. Important for investors because : <ul><li>Invest in the business? </li></ul><ul><li>Lend it some money? </li></ul><ul><li>Buy the organization outright? </li></ul>
  16. 16. Consists of: <ul><li>1.Assets -Def : Items of monetary value for a co. </li></ul><ul><li>Types: </li></ul><ul><li>1.Fixed assets : </li></ul><ul><li>-Co will have for a long time( >1yr) </li></ul><ul><li>-not intended for immediate resale </li></ul><ul><li>e.g.-vehicles ,machinery </li></ul>
  17. 17. Fixed assets are divided into : <ul><li>Tangible : A physical form e.g. Land, equipment, vehicles </li></ul><ul><li>Intangible : No physical form e.g. goodwill, copyrights/patents </li></ul>
  18. 18. Assets cont:. <ul><li>2.Current assets </li></ul><ul><li>Changes daily </li></ul><ul><li>Not kept for long term </li></ul><ul><li>May be changed into cash by year end. </li></ul><ul><li>e.g. stock ,debtors and cash. </li></ul><ul><li>3.Others assets : e.g. Investments in co’s. </li></ul>
  19. 19. 2.Liabilities: <ul><li>Def: Money owed by co. </li></ul><ul><li>Shareholders’ funds-Funds invested by owners (e.g. shareholders) </li></ul><ul><li>Long term-Repay in more than 1 years time e.g. bank loan </li></ul><ul><li>Current-Repay within a year e.g. trade creditors , Bank overdraft </li></ul>
  20. 20. Spark Ltd: Balance Sheet for the 31 st Dec.2003 <ul><li>Fixed assets </li></ul><ul><li>Property 180 </li></ul><ul><li>Machinery 120 </li></ul><ul><li>Total F.A 300 </li></ul><ul><li>Current assets </li></ul><ul><li>Stocks 80 </li></ul><ul><li>Debtors and cash 60 </li></ul><ul><li>Less: current liabilities (40) </li></ul><ul><li>Net current assets/working capital 100 </li></ul><ul><li>( Ca - CL )( 80+60 - 40 ) </li></ul>
  21. 21. Spark Ltd: Balance Sheet for the 31 st Dec.2003 <ul><li>Fixed assets </li></ul><ul><li>Property 180 </li></ul><ul><li>Machinery 120 </li></ul><ul><li>Total F.A 300 </li></ul><ul><li>Current assets </li></ul><ul><li>Stocks 80 </li></ul><ul><li>Debtors and cash 60 </li></ul><ul><li>Less: current liabilities (40) </li></ul><ul><li>Net current assets( 140 -40 ) 100 </li></ul><ul><li>= Assets employed ( 300 + 100 )400 </li></ul><ul><li>=== </li></ul>
  22. 22. Definitions: <ul><li>Net current assets/working capital </li></ul><ul><li>=CA-CL </li></ul><ul><li>2. Asset employed </li></ul><ul><li>=Fixed assets + N. C. assets </li></ul><ul><li>3.Aim to Balance , Balance sheet by: </li></ul><ul><li>Asset employed=Total capital employed </li></ul>
  23. 23. Spark Ltd: Balance Sheet for the 31 st Dec.2003 <ul><li>Fixed assets </li></ul><ul><li>Property 180 </li></ul><ul><li>Machinery 120 </li></ul><ul><li>Total F.A 300 </li></ul><ul><li>Current assets </li></ul><ul><li>Stocks 80 </li></ul><ul><li>Debtors and cash 60 </li></ul><ul><li>Less: current liabilities (40) </li></ul><ul><li>Net current assets/working capital 100 </li></ul><ul><li>= Assets employed (300+100) 400 </li></ul><ul><li>=== </li></ul><ul><li>Sources of finance </li></ul><ul><li>Loan capital 250 </li></ul><ul><li>Share capital 50 </li></ul><ul><li>Retained profit( from P&L) 100 </li></ul><ul><li>=Total capital employed 400 </li></ul><ul><li>=== </li></ul>
  24. 24. Published accounts of a limited company <ul><li>Differences: </li></ul><ul><li>1.Creditors due within one year (40) </li></ul><ul><li>(was current liabilities) </li></ul><ul><li>2.Total assets less current liabilities 400 </li></ul><ul><li>(was Assets employed) </li></ul><ul><li>3.Creditors due after one year 250 </li></ul><ul><li>(was long term liabilities) </li></ul><ul><li>4.In A private co-we balance: </li></ul><ul><li>Asset employed with total capital employed </li></ul><ul><li>In a public co-we balance: </li></ul><ul><li>Total net assets with shareholders funds </li></ul>