ACCOUNTING BASICS P&L ACCOUNT:
Gross profit:
TERMINOLOGY: This entry is calculated as follows:
ALL BUSINESS INCOME – COST OF SALES = GROSS PROFIT
Accounting terminology used by sole traders, partnerships and
companies will differ. Cost of sales:
This entry is calculated as follows:
Sole traders / Partnerships Companies OPENING STOCK + PURCHASES – CLOSING STOCK = COST OF SALES
Cash at Bank/Petty cash/Cash in hand Cash and cash
Capital Equivalents Cost of sales = all costs that are needed for the business to earn money
Creditors Equity eg. cost of stocks.
Creditors – amounts due for more than 1 year Payables
Creditors – amounts due for 1 year or less Non-Current Liabilities
Debtors Current Liabilities Net profit:
Depreciation Receivables Net profit = profit for the year
Fixed Assets Impairment
Interest Non-current assets First Second Explanation
Profit and Loss Account Reserve Finance Costs calculations calculations
Provision for Doubtful Debts Retained Earnings Income Heading
Stock Impairment of Receivables Revenue £300,000
Total Shareholder Funds Inventory Opening £50,000 £50,000 is underlined because
Total Equity Inventory you will need to add up this
Purchases £50,000 figure with the ones above.
FINANCIAL STATEMENTS: £100,000 Total of £50,000 + £50,000
£100,000 Starting point for another calc
Accounts = Less Closing (£30,000) Brackets mean minus
1. Bookkeeping: Records of money transactions – eg. when the Inventory
business receives money from a client, this will go into one of the Cost of sales £70,000 (£70,000) Total of £100,000 - £30,000
company’s ‘accounts’. This will be used for the 2nd
2. Financial Statements: Periodic reports on the performance of a calcs so you will directly write
business – eg. Balance sheet and other reports to tell if the the total to the second column.
business is bringing in a profit or losing money. This will be the Total £230,000 Total of £300,000 - £70,000
focus of Business Accounts. income
Financial Statements = These reports are prepared in respect of each BALANCE SHEET:
accounting period which usually covers 1 year.
The Balance Sheet is a snapshot of the company’s assets and liabilities
A business is free to choose its accounting period: at a given date and will list every transaction that has lead up to that
It can be eg. 1 Nov – 31 Oct every year. date from a given starting date.
But it is usually the tax year: 5 Apr – 4 Apr
The P&L Account is different in that it reflects the company’s financial
Financial Statements: year from beginning till the end.
• Profit and Loss Account (P&L Account)
• Balance Sheet. The Balance Sheet will tell the reader that:
1. The net worth or net asset value (NAV) of the business
BASIC PRINCIPLES: ASSETS – LIABILITIES = NAV
2. The capital invested in the business
Financial Statements are created using double-entry bookkeeping. If The Balance Sheet will have two parts, the top half, showing the NAV
the owner pays money into the business, the business will owe him the
amount paid. This means that every business transaction will be and the bottom half showing the invested capital.
recorded twice in the accounts: one credit + one debit entry.
Entry categories:
Eg: if a machinery is purchased for £1,000
Cash: reduced by £1,000 Assets:
Business Assets: increased by £1,000 There is a distinction between fixed and long-term assets.
Fixed assets = held in the business long-term, such as land and buildings,
ALCIE Classification: machinery, etc.
Similar transactions are classed into one category and recorded in one Current assets = these come and go in the short term, these are usually
place called a ‘nominal ledger’. converted into cash within 1 year.
Net Book Value of an asset = cost of acquiring the asset – depreciation
ALCIE Accounts:
1. Assets = something you own. – eg. machinery, vehicles, cash at bank, Net Assets:
trademark, patent, goodwill. FIXED ASSETS + NET CURRENT ASSETS – LONG TERM LIABILITIES = NET
2. Liabilities = something you owe. – e.g. loans, trade debts ASSETS
3. Capital = an injection of money from the owner or an investor. –
eg. the owner of the business providing money to their business Liabilities:
4. Income earned by the business – this will come from regular Liabilities are categorised as either current or long term.
sources. – e.g. product sales, service charges etc. Current liabilities = due to be paid within one year
5. Expenses of running the business – e.g. heating and lighting, Long term liabilities = due to be paid after at least a year.
telephone, postage bills etc.
Entries:
TRIAL BALANCE: Debit = increase in asset or expense, decrease in liability
Credit = decrease in asset or expense, increase in liability
You will not need to prepare a Trial balance on the LPC but you should
be able to understand how they work. A trial balance will usually form Business sells premises for £200,000
the basis for the P&L Account and Balance Sheet. Effects:
Fixed assets (premises) decrease by £200,000
Accounting transactions have a dual nature: for every debit entry there Current assets (cash) increase by £200,000
is a corresponding credit entry. Thus, the sum of all debit balances will
always be the same as the sum of all credit balances. – This is tested out Loan of £10,000
in the trial balance. If the totals don’t balance each other out, then Effects:
something has been missed out. Current assets (cash at Bank) decrease by £10,000
Long Term Liabilities increase by £10,000
Debit Credit
Capital £50,000 Purchase of new equipment for £5,000
Equipment £50,000 Effects:
Loan £2,000 Current assets (cash at Bank) decrease by £5,000
Cash £2,000 Fixed Assets (equipment) increase by £5,000
Total £52,000 £52,000
BLP - Business Accounts | Page 1 of 6
