The Trading Profit and Loss Account Account
Businesses usually calculate their profit level by creating a Trading Profit and Loss Account (TPL) The TPL is produced because: It is a legal requirement It summarises all the year’s transactions It shows the financial ‘health’ of the business. Can be used to compare trade this year with trade last year
© Business Studies Online: Slide 1 The Parts of A T,P&L Account Account
The document is made up of 3 sections which must be completed in turn: The Trading
Trading Account
Account
The
Thiscalculates
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gross
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calculate
The Appropriation
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© Business Studies Online: Slide 2 The Structure of a TP&L Account (1) (1)
Need to calculate
how much it has
cost to make the
goods that have
been sold
Trading Profit and Loss Statement For Lou Pole, year ending 31.08.04 £ £ Value of stock Sales 400,000 owned at the
start of the year LESS Cost of sales Opening Stock 100 Value of raw
Purchases 100,000 materials
100,100 purchased
during the year
Less Closing Stock 100 Value of stock
left at the end
of the year.
This will be
next year‛s
OPENING
STOCK Business
Name and
Date
Sales, the
money from
selling goods
100,000 Gross profit 300,000 Calculated by
subtracting
cost of sales
from sales
© Business Studies Online: Slide 3 The Structure of a TP&L Account (2)
Expenses
listed and
a total
given
£ Gross profit LESS Expenses Salaries Rent Other Total expenses Net profit Corporation Tax Profit after tax Dividends Retained profit Calculated by subtracting dividends.
This is the amount of money that will be
kept in the business
75,000 25,000 14,000 114,000 £ 300,000 Calculated by
subtracting
expenses from
Gross Profit 186,000 74,400 111,600 5,580 106,020 Calculated
by
subtracting
tax from
net profit
© Business Studies Online: Slide 4 Different Types of T,P & L Accounts Accounts
The T,P & L Accounts of businesses will differ according to their legal structure Companies (Ltds & Plcs) are subject to more legal constraints: The Accounts Of Incorporated Businesses Accounts must be published Accounts usually show figures for 2 years They must show how the profit is being used (Appropriation Account)
© Business Studies Online: Slide 5 The Limitations Of T,P & L L
The trading, profit & loss account is a historical view of the business It does not tell us what will happen in the future – although it may help to identify trends Businesses may “manipulate” accounts in order to reduce their tax liabilities, or to deter a potential takeover
© Business Studies Online: Slide 6 Working Capital Capital
Working capital refers to the materials that a business needs in order to make the products that it sells Without working capital a business would be unable to operate It is the working capital that produces profit and as such it is referred to as an investment However, working capital items are NOT intended to be kept by the business
© Business Studies Online: Slide 7 How Money Works In Business Business
Money constantly goes round a business in a cycle This can be shown as follows:
© Business Studies Online: Slide 8 The Speed of the Working Capital Cycle Cycle
If the amount of cash at the end of the cycle is bigger than that at the start then a firm will make a profit How much profit depends upon how quickly they can get round this cycle. How quickly it can get round depends on two factors: Speed of The Working Capital Cycle Creditors • People a business owes money to.
• They speed up the cycle Debtors • People who owe the business money.
• They slow down the cycle.
© Business Studies Online: Slide 9 Calculating the Working Capital
The working capital of a firm is calculated as follows: Working Capital = Current Assets – Current Liabilities Where: Current Assets = Anything a business owns, which it intends to sell Examples include raw materials, stock, debtors and cash. Current Liabilities = Anything that a business owes, which must be paid within the next 12 months Examples include creditors, overdraft and dividends. This calculation is part of the BALANCE SHEET © Business Studies Online: Slide 10 What is a Balance Sheet? Sheet?
A Balance Sheet is a financial statement which shows the ASSETS, LIABILITIES and CAPITAL of a business on a particular date Assets
Assets
Capital
Capital
Areitems
itemsowned
owned
Are
bythe
thebusiness
businessor
or
by
owedto
tothe
the
owed
business
business
Isthe
themoney
money
Is
investedby
bythe
the
invested
ownersor
or
owners
shareholders
shareholders
Liabilities
Liabilities
Areamounts
amountsowed
owed
Are
bythe
thebusiness
business
by
© Business Studies Online: Slide 11 The Key Principle of a Balance Sheet Sheet
Businesses can only spend money that they either have, or have borrowed then:
All Assets
must equal All Liabilities © Business Studies Online: Slide 12 The Structure of a Balance Sheet (1) (1)
Business
Name and
Date
Balance Sheet For A.B.Hive LTD as at 31 December 2004 Fixed assets Building Equipment £ Fixed Assets
are listed and
then added up.
Current assets Stock Debtors Cash at bank 30,000 10,000 5,000 45,000 £ 170,000 60,000 230,000 Current Assets
are listed and
totalled
© Business Studies Online: Slide 13 The Structure of a Balance Sheet (2) (2)
Current Liabilities
listed and totalled
Current liabilities Trade creditors £ £ Calculated by
current assets –
current liabilities
25,000 Net Current Assets 20,000 OR Working Capital Less Long Term Liabilities Mortgage 45,000 Loan 5,000 50,000
Net Assets Calculated by fixed
assets + working
capital – long term
liabilities Long Term
liabilities
are listed
and
totalled,
then taken
away
200,000 © Business Studies Online: Slide 14 The Structure of a Balance Sheet (3) (3)
FINANCED BY:­ This section shows
where the money in the
business has come
from.
£ Capital and reserves Share capital Profit and loss account 75,000 125,000 Total Capital Employed 200,000 This means that
£200,000 has been
invested in the business
© Business Studies Online: Slide 15 Who Uses A Balance Sheet?
Both the balance sheet and the profit and loss account show the ‘health’ of the business All the stakeholders will be interested in the balance sheet, but especially: Shareholders Customers Suppliers Employees When used with the Trading Profit and Loss account it shows how well the business is doing © Business Studies Online: Slide 16 The Limitations Of The Balance Sheet Sheet
As soon as it is produced it is out of date Fixed assets may be over­valued if they are depreciated incorrectly Businesses are not required to include “intangible assets” such as brand names. This can understate the value of the company Companies tend not to give a breakdown of the figures – they just quote totals
© Business Studies Online: Slide 17 Differences In Accounts Accounts
Different types of business produce different types of accounts, due to legal requirements: Unincorporated Businesses Must produce
accounts for
taxation purposes
Incorporated Businesses Must publish
accounts
Are usually in a
simple format
Often abbreviated
so competitors get
limited
information
T, P & L A/C will
not have an
Appropriation
Account Usually show 2
years figures
Some terminology
is changed
© Business Studies Online: Slide 18 Share Capital Vs Loan Capital Capital
There is a big difference between share capital and loan capital: Share Capital Loan Capital The total amount invested in a business by shareholders Note that share capital is NOT the same as Shareholders funds Is medium – long­term finance provided by: Banks Debentures Other lenders
© Business Studies Online: Slide 19 Share Capital Vs Shareholders Funds Funds
Any profits invested in a business belong to it’s shareholders As such Shareholders funds can be calculated as: Shareholders Funds = Share Capital + Reserves
© Business Studies Online: Slide 20