Trading Profit And Loss CMD


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Trading Profit And Loss CMD

  1. 1. The Trading, Profit and Loss Account Higher/Int 2 Business Management 2009-2010
  2. 2. Communication <ul><li>One of the Roles of Finance is communication of information with the use of an accounting system. </li></ul><ul><li>So that information can be communicated in a recognisable form , items of a similar nature are gathered together and reported in standard Financial Statements . </li></ul>
  3. 3. The Accounting System <ul><li>There are a number of stages involved in an accounting system: </li></ul><ul><ul><li>Preparing and recording accounting documents. </li></ul></ul><ul><ul><li>Transferring the information from the documents to records in books or on a computer. </li></ul></ul><ul><ul><li>Preparing the financial statements . </li></ul></ul>
  4. 4. Why Must We Account? <ul><li>Accounts must be kept to: </li></ul><ul><ul><li>Ensure a secure record of all transactions in order to prevent fraud . </li></ul></ul><ul><ul><li>Produce accounts for tax purposes . </li></ul></ul><ul><ul><li>Monitor business performance , so that managers and owners can see how well the company is doing. </li></ul></ul>
  5. 5. The Two Main Financial Statements <ul><li>The two main financial statements are: </li></ul><ul><ul><li>The Balance Sheet . </li></ul></ul><ul><ul><li>The Trading Profit and Loss Account . </li></ul></ul><ul><li>These statements provide information relating to a particular aspect of the organisation’s activities during a trading period - usually one financial year. </li></ul>
  6. 6. The Trading Profit and Loss Account <ul><li>The Trading Profit and Loss Account can be split into two sections: </li></ul><ul><ul><li>The Trading Account . </li></ul></ul><ul><ul><li>The Profit and Loss Account . </li></ul></ul><ul><li>The Trading Profit and Loss Account is a historical review of the sales revenue and expenditure of a business for the previous financial year . </li></ul>
  7. 7. The Trading Account <ul><li>The Trading Account shows the profit, before charging any expenses or overheads like heat, light, wages or telephone bills. </li></ul><ul><li>This allows the owner to see how healthy the profit is before these expenses are included. </li></ul>
  8. 8. Gross Profit <ul><li>The Trading Account shows the gross profit (or loss) for the reporting period. </li></ul><ul><li>The gross profit equals the sales revenue minus the cost of goods sold . </li></ul>
  9. 9. The Trading Account: Items <ul><li>Sales </li></ul><ul><li>Purchases </li></ul><ul><li>Returns Inwards (Sales Returns) </li></ul><ul><li>Returns Outwards (Purchase Returns) </li></ul><ul><li>Carriage Inwards </li></ul><ul><li>Opening Stock </li></ul><ul><li>Closing Stock </li></ul>
  10. 10. The Profit and Loss Account <ul><li>The Profit and Loss Account is completed after the Trading Account . It shows the net profit after all expenses and overheads have been charged. </li></ul>
  11. 11. The Profit and Loss Account <ul><li>The Profit and Loss Account starts with the gross profit figure from the Trading Account. </li></ul><ul><li>It then lists any items of additional revenue raised by the business, as well as any expenses incurred by the business not directly linked to trading . </li></ul>
  12. 12. Net Profit <ul><li>The Profit and Loss Account shows the net profit (or loss) for the reporting period. </li></ul><ul><li>The net profit equals the gross profit minus all expenses and overheads . </li></ul>
  13. 13. The Profit and Loss Account: Items <ul><li>Discounts Received </li></ul><ul><li>Commission Received </li></ul><ul><li>Profit on the Disposal of Assets </li></ul><ul><li>Expenses such as: </li></ul><ul><ul><li>Wages </li></ul></ul><ul><ul><li>Carriage Outwards (Dispatch of Goods) </li></ul></ul><ul><ul><li>Rent </li></ul></ul><ul><ul><li>Rates </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Advertising </li></ul></ul><ul><ul><li>Bad Debts Allowance </li></ul></ul><ul><ul><li>Depreciation </li></ul></ul><ul><ul><li>Stationery </li></ul></ul>
  14. 14. Appropriation of Profits <ul><li>The Profit and Loss Account shows how profitable a business has been over a period of time . </li></ul><ul><li>Partnerships and limited companies produce an extra section in their Profit and Loss Account called the Appropriation Account . This shows how profits or losses are to be shared between different parties . </li></ul>
  15. 15. Interpretation <ul><li>The Trading Profit and Loss Account can help us to answer the following questions: </li></ul><ul><ul><li>Was this year’s trading result good or bad compared with last year or with a rival company ? </li></ul></ul><ul><ul><li>Has the gross profit figure improved this year compared with last year? </li></ul></ul><ul><ul><li>Are we making efficient use of our stock ? </li></ul></ul><ul><ul><li>Does our net profit figure compare favourably with those of other businesses in the same industry ? </li></ul></ul>
  16. 16. Task <ul><li>Read pages 10-15 from your core notes. </li></ul><ul><li>Using the knowledge gained from this presentation and the relevant pages in the core notes, answer Activity 3 on the Trading Profit and Loss Account. </li></ul>