Statement of Profit or Loss Flashcards
what does the statement of profit ot loss show
an entities incomes and expenditure for the whole financial year
define income
thr revenue earned during the financial year
define expenditure
the expenses incurred during the financial year
what can sopl also be called
consolidated income statement
the profit and loss account
define revenue
income made from sales made in ordinary course of business
what is gross profit
revenue - cost of sales
what is operating profit
gross profit - distribution and selling costs - administration expenses
what is profit before tax
operating profit + finance income - finance expense
what is finance expense
interest payable eg on loans
what is finance income
interest receivable eg on loans given out, dividends from other companies
how to calculate profit for the year
profit before tax - income tax
what are examples of operating expenses
distribution and selling costs
admin costs
if the gross profit is much larger than the operating ptofit what might the business look into
reducing their operating costs
define income
increases in assets or decreases in liabilities that result in an increase in equity
if cash increases by 100 euros from a sale is this an income
yes as assets will increase and equity will increase by profit made
if trade receivables increases by 100 euro frpm a sale made on credit is this an income
yes as assets will increase and equity will increase by profit made
if a loan of 100 euro is taken out does this count as income
no as assets increases but liabilities also does
no change on equity
define expense
decrease in assets or increase in liabilities that result in a decrease in equty
why is a new loan not considered an expense
no impact on equity
increased liabilities and increased assets only
is paying a trade payable expenditure
decrease in assets and decrease in liabilities but no change on equity
so no
are dividends an expense
distribution of equity
not in normal course of business. so no
what is revenue also referred to as
sales or turnover
other sources of income than revenue
finance income
profits on the sale of non current assets
types of expenditure
cost of sales
distribution and selling costs
administration costs
finance expenses
income tax
losses on the sale of non current assets
what is included in the distribution and selling costs
transport
advertising
retail expenses
what is included in the admin costs
salaries and wages
telephone bills
rent
insurance
how to calculate cost of sales for the year
opening inventory + purchases during accounting period - closing inventory
what is opening inventory
stock in warehouse on the first day of the year
what is closing inventory
the stock in the warehpouse on the last day of the yeat
what does this year’s closing inventory become
next years opening inventory
what is the final profit (profit for the year) used for
distribute to shareholders as dividends or retain within the business for future expansions
what is the accruals basis of accounting
that all income earned in an accounting period is recognized in that accounting period
what is the reasons for accruals basis of accounting
financial performance isnt subject to maniuplation, and is faithfully represented
are prepayments assets or liabilities
assets
why are pre payments assets
- arise from past events
- are a present economic resource controlled by then entity
- have the potential to produce economic benefits
are pre payments current or non current assets
current
how to calculate pre payments on income statement
add prepayment at start pf the year
add payments made during the year
deduct prepayment at end of the year
what is a pre payment
expenses paid in advance of the accounting period to which they relate
define accrual
expenses incurred for goods and services which have been received but not paid for by the year end date
are accruals assets or liabilities
liabilities
why are accruals liabilities
arise from past events
are a present obligation of the entity
will result in a transfer of economic resource
under what heading do accruals come
trade and other payabales
are accruals current or non current liabilities
current
how to calculate accruals on income statement
deduct accrual at the start of the year
add payments made during the year
add accrual at the end of the year
is depreciation an income or expense
expense
are both intangible and tangible assets depreciated
yes
tangible - depreciated
intangible - amortised
is land depreciable
no
define depreciation
an annual expense which progressively reduces the cost of a non-current asset in the statement of financial position
four factors to be considered when calculating depreciation charge of an asset
the cost (or fair value) of the asset
the useful life of the asset
residual value(disposal value)
depreciation methods
what does cost of the asset include
cost of acquiring the asset
delivery costs
instillation costs
alteration costs
what is the useful life of the asset
how long we expect the asset to last and be useful
what is the residual value
the money we would get when selling the asset at the end of its useful life
what are the two methods of depreciation
straight line
reducing balance
what is straight line depreciation
an equal amount of depreciation allocated to each year of a non current assest’s useful life
calcualtion for yearly straight line depreciation of a non current asset
(cost-residual value)/number of years of useful life
calculations for fixed rate reducing balance depreciation
year 1: cost x fixed%
years after: carrying amount x fixed%
when do businesses estimate the residual value of a non current asset
at the date of aquisition
what happens if a non current asset is sold for more than its residual value on disposal
record a profit in the income statement
what happens if a non current asset is sold for less than its residual value on disposal
RECORD a loss in the income statemnt
what are bad debts/irrecoverable debts
some customers will not pay or will be unable to pay back for goods received. These non payments are known as bad debts
where are bad debts deducted from
trade receivables
where do bad debts get added to
bad debt expense
what are allowances for receivables aka doubtful debt
trade receivables that may not be collected rather than definitely not
why might goods be returned by customers
unsuitable
not what they ordered
are not of the required quality
faulty
how to treat sales returns in accountign
deduct sales returns from sales (revenue)
deduct trade receivables
how to treat purchase returns in accounting
deduct from cost of sales
deduct from trade payables
examples of things that might be pre paid
insurance premiums, utilities eg light and heat
why do we record depreciation
as we will benefit from that asset and need to account for that against income generated
example of an asset that may follow straight line depreciation
buildings
example of an asset that may follow reducing balance depreciation
machinary
leftover allowances for trade receivables last year are treated as what for this year
profit
