Trading and Profit and Loss Account Flashcards
What are the three things calculated in the TPL AC?
Cost of goods sold, gross profit and net profit
What does ‘net’ mean?
after deductions`
What is carriage inwards?
the money you pay to get the goods to you
What are the two formats in the TPL AC?
vertical and horizontal
How do you calculate the cost of goods available for resale?
add the opening stock to purchases and carriage inwards
What are the two types of financial statements?
Trading and Profit and Loss account / Income statement
Balance sheet / statement of financial position
What is the first calculation done in the income statement?
sales or net sales
What is the purpose of the Income statement?
1) It is one of the most important financial statements of the business which is used to show the profit and loss incurred by the business over a period of time. It is a requirement for correct financial reporting.
2) It is prepared at least once a year but could easily be made available for a shorter period if required.
3) The financial reports and statements produced by this process are used by owners and managers to monitor the continuing viability of the business.
4) The financial statements are also used by other groups who are interested in the activities of the business, these include Inland revenue, customers, investors, suppliers and employees.
5) The main purpose of this account is for the owners to see how profitably the business is being run.
Why does Inland revenue need the information from the financial statements of a business?
they collect employees’ and business taxes
Why do investors need the information from the financial statements of a business?
(investors can be private individuals, companies or banks who will want to monitor the performance of a business)
in order to ensure that they will get a return on their investment
Why do suppliers need the information from the financial statements of a business?
in order to be sure of the financial stability of a business before accepting orders
Why do customers need the information from the financial statements of a business?
in order to be sure of the financial stability of a business before placing orders
Why do employees need the information from the financial statements of a business?
(a sound business with a good working environment will help to keep employees’ morale high and will be able to attract high calibre new staff)
they will need to calculate the tax to be paid by the business
What is the main use of the income statement?
to compare the results obtaained with the results expected. In a trading organization, much attention is paid to how much profit is made before deducting expenses
What is gross profit
the excess sales over the cost of goods sold in the period
