Sadia Hussain Unit 5
D2 - Evaluation
“As the name suggests they are the final accounts which are prepared at the
last stage of an accounting cycle. Final accounts show both financial position of
a business along with the profitability, they are used by external and internal
parties for various purposes.” The final accounts include all the journal entries
used to close the books; they are used as a final stage of the accounting cycle.
The final accounts show the financial position of a company, and can be used
to make changes, decisions and even used by
the company’s stakeholders such as banks,
investors and suppliers. The final accounts
include the trading account, the profit and loss
account and balance sheet.
Trading account
“A trading account can be any investment account containing securities, cash
or other holdings. Most commonly, trading account refers to a day trader’s
primary account.” The trading account is financial statement that shows the
cost of trading and purchases and the goods to be sold. In the trading account,
it includes the sales, purchases and the cost of goods sold. One of the elements
of the trading account is the sales. A sale happens when a business exchanges
their goods for money.
In order to find the total amount of money a business has made from their
sales, they have to multiply the number of goods sold by the price of the
goods. Sales figure is extremely important for companies to know as it shows
them weather they are performing well or not, so they can make changes such
as increase the price of the goods or try to increase the number of goods sold if
they are making a less amount of money.
Another element of the trading account is the purchases; these are the
purchases that the company has made from outside sources such as another
business or a supplier. For example, in order to produce goods a company may
need raw materials; these are then bought from the suppliers who the
business pays in return. The trading account also includes other expenses
leaving the business such as wages, drawings etc. The purpose of a trading
account is that it holds money for the company’s financial goals. Investors
open a trading account to buy or sell stock. “The purpose of an account could
focus on day or short-term trading on the stock market, buying and holding
long-term stocks, or handling investments for retirement savings.”
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, Sadia Hussain Unit 5
Profit and loss account
“Profit and loss accounts show your total income and expenses, and also shows
whether your business has earned more income than it has spent on its running
costs.” After preparing the trading account, companies then prepare the profit
and loss account which is another income statement part of the final accounts.
The profit and loss account includes the details of the organisations
transactions, showing how much profit or loss the business have made by
subtracting the total of the money going out from the income; it shows the
gross profit and also the net profit. Profit and loss account helps organisations
to see how well they are doing, it shows their financial health and performance
for a period of time such as a month, year etc. Businesses can view the profit
and loss account to see if they have achieved their goal on making a certain
amount of profit, and so they are able to make changes and improvements if
the business is not doing so well such as if they are making a loss. It also helps
shareholders of the company to see how well they are doing by viewing the
P&L. Profit and loss account includes the sales revenue, the cost of sales and
how much gross profit the business has made. It also shows other expenses,
non-trading income, net finance costs, and profit for the year and earnings per
share. The main purpose of a profit and loss account is that it shows a business
if they made a profit or a loss in that particular period.
There are many people that would interested in a company’s profit and loss
account, such as the owners and shareholders, because they put money into
the business, so if they do not receive at least the money that they put in or
less then they would want to know where the money is gone. Other
stakeholders that would be interested are the suppliers and other creditors,
they want to know the business is making money and not loss,
because if they were making a loss, then the suppliers would not
provide the business with any stock because they would know that
the company will not pay them back due to the condition of the
company based on looking at their profit and loss account.
Customers and local community would also be interested in a
company’s profit and loss account, as they want to know how the
businesses in the local area are doing, so they know what area has
the most successful businesses. The competitors may also be
interested in the final account statements, because they want to
compare the company against themselves and see if they are doing
better.
Sales
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