3. 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

4. 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.

5. Profit & Loss account for the year ended 30 September 20x7
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
The P&L account should always state the name of the business and the accounting period for which it has been prepared.

6. Cost of goods sold Purchases = 54,000 Closing inventory = 12,680

7. Gross profit Gross profit = £7,370 Purchases = 852,630
Closing inventory = 410,000
Cost of goods sold = ?
Sales revenue = 30 X 15000
Cost of goods sold = ?
Gross profit = ?
442,630
Gross profit = £7,370

8. Therefore the cost of the goods sold was £9,000.
Cost of goods sold
Each TV costs £1,000. The shop bought 12 TVs. Their total purchases was therefore £12,000
At the end of the month there were 3 TVs left. 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

9. £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)

10. 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
Sept30 Balance b/d 13,500
2012
Sept30 balance b/d 9,000
Closing inventory a/c Dr Cr
2012
Sept30 balance b/d 3,000
We are going to ‘link’ all these accounts with the ‘trading account’

11. 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
Sept30 Balance b/d 13,500
2012
Sept30 Trading 12,000
2012
Sept30 Trading 13,500
2012
Sept30 balance b/d 9,000
Closing inventory a/c Dr Cr
2012
Sept30 Trading 300
2012
Sept30 balance b/d 3,000
The balance of the sales a/c is transferred to the trading a/c.
Debit the sales a/c (closing it)
Credit the trading a/c
We need to record the closing inventory.
Debit the closing inventory a/c with the value of closing inventory
Credit the trading a/c
The balance on the purchase a/c is transferred to the trading a/c.
Debit the trading a/c
Credit the purchase a/c (closing it)

12. GROSS PROFIT So our trading a/c looks like this Trading a/c Dr Cr
2012 -
Sept30 Purchases ,000
2012 -
Sept30 Sales ,500
30 Closing inventory 3,000
Sept 30 Gross profit 4,500
16,500
16,500
So our trading a/c looks like this

13. NET PROFIT or LOSS Profit & Loss Trading a/c Dr Cr 2012 -
Sept Rent ,000
2012 -
Sept30 Gross Profit ,500
Sept Lighting 800
Sept Wages 2,000
Sept Net profit/loss 700
4,500
4,500

14. NET PROFIT or LOSS The expense accounts will now be closed-off. Dr
Rent a/c Cr Dr
Lighting a/c Cr
2012
Sept30 balance 1,000
2012
Sept30 balance 800
2012
Sept30 P&L a/c 1,000
2012
Sept30 P&L a/c 800
Wages a/c Dr Cr
2012
Sept30 balance 2,000
2012
Sept30 P&L a/c 2,000

15. The P&L Statement £ £ Sales 13,500 Less cost of goods sold:
£ £
Sales ,500
Less cost of goods sold:
Purchases 12,000
Closing inventory (3,000)
= 9,000 (COGS)
Gross profit ,500
Less expenses:
Rent 1,000
Lighting 800
Wages 2,000
Net profit