P5 Unit 2
Produce a written interpretation of the key elements of the trading and profit and loss account
and the balance sheet.
The selected company that I’m going to interpret the contents of a ‘trading and profit’ and ‘loss
account and a balance sheet’ is Domestic Dog Homes. I am going to interpret content from The
Trading and Profit and Loss accounts for 12 months ending in 31/12/2010 as well as their balance
sheet.
Income Statement
An income statement is a summary of a management’s performance which is reflected in the profits
of an organisation over a certain period. It displays the revenues generated as well as the expenses
of the business that led to the current profit or loss, it also indicates what may have been done to
improve the results. An income statement displays the performance over a month, quarter, or year
of trading. “It shows the rate at which the owners’ equity is changing for better or worse.”
The financial statement consists of the revenue that is generated by the business. Revenue is
calculated by ‘Number of units sold * Price of Unit’. Domestic Dog Homes revenue generated over a
period of 12 weeks from 31/12/2009 – 31/12/2010 is £64,000.
The cost of sales is the accumulated total of all costs used to create a product or service which has
been sold. In this case, the cost of sales for Domestic Dog Homes is the total cost of supplying a
product, this includes transportation costs as well as production costs. Domestic Dog Homes cost of
sales is an overall amount of £4,000 over a 12 month trading period in the years 2009/2010.
Gross profit is the profit a company makes after deducting the costs that are associated with the
production and selling of its products. The gross profit is shown on the income statement. It is
calculated using the following formula; ‘Gross Profit = Revenue – Costs of Goods’. Over a period of
12 months from 2009 – 2010, Domestic Dog Homes generated a gross profit of £33,000.
All businesses have expenses to cover, expenses are the main cause for the huge outflow of cash
within a business. The expense a business has to cover are all the costs, for e.g. running costs such as
electricity, also wages for employees. It is important for businesses to cover all their costs in order to
stay running. Over a period of 12 months from 2009 – 2010, domestic dogs have had to cover a total
expense of £21,400. This tells me that the firm has been covering its costs.
The income statement also calculates and displays the net profit. The net profit is the actual profit
after working expenses have been paid, expenses are not paid in gross profit, which differentiates it
from net profit. Net profit is calculated using the following formula; ‘Net profit = Total revenue –
Total expenses’. In this case, to calculate net profit over a period of 12 months from 2009 – 2010 is,
£33,000 - £21,400 = £ 11,600. The total net profit generated by Domestic Dogs home is £11,600, and
since it is a positive number, it tells me that Domestic Dogs Homes are currently successful and safe
as they were able to cover all costs as well as attain a profit.
Balance Sheet
A balance sheet is statement of financial position of a firm, it is used to determine where a
company’s financials is currently standing because it lists what a company owns and what it owes.
The balance sheet contains summarized information on a company’s assets. It also shows how the
Net Assets have been financed, for example through share capital or retained profits.
Produce a written interpretation of the key elements of the trading and profit and loss account
and the balance sheet.
The selected company that I’m going to interpret the contents of a ‘trading and profit’ and ‘loss
account and a balance sheet’ is Domestic Dog Homes. I am going to interpret content from The
Trading and Profit and Loss accounts for 12 months ending in 31/12/2010 as well as their balance
sheet.
Income Statement
An income statement is a summary of a management’s performance which is reflected in the profits
of an organisation over a certain period. It displays the revenues generated as well as the expenses
of the business that led to the current profit or loss, it also indicates what may have been done to
improve the results. An income statement displays the performance over a month, quarter, or year
of trading. “It shows the rate at which the owners’ equity is changing for better or worse.”
The financial statement consists of the revenue that is generated by the business. Revenue is
calculated by ‘Number of units sold * Price of Unit’. Domestic Dog Homes revenue generated over a
period of 12 weeks from 31/12/2009 – 31/12/2010 is £64,000.
The cost of sales is the accumulated total of all costs used to create a product or service which has
been sold. In this case, the cost of sales for Domestic Dog Homes is the total cost of supplying a
product, this includes transportation costs as well as production costs. Domestic Dog Homes cost of
sales is an overall amount of £4,000 over a 12 month trading period in the years 2009/2010.
Gross profit is the profit a company makes after deducting the costs that are associated with the
production and selling of its products. The gross profit is shown on the income statement. It is
calculated using the following formula; ‘Gross Profit = Revenue – Costs of Goods’. Over a period of
12 months from 2009 – 2010, Domestic Dog Homes generated a gross profit of £33,000.
All businesses have expenses to cover, expenses are the main cause for the huge outflow of cash
within a business. The expense a business has to cover are all the costs, for e.g. running costs such as
electricity, also wages for employees. It is important for businesses to cover all their costs in order to
stay running. Over a period of 12 months from 2009 – 2010, domestic dogs have had to cover a total
expense of £21,400. This tells me that the firm has been covering its costs.
The income statement also calculates and displays the net profit. The net profit is the actual profit
after working expenses have been paid, expenses are not paid in gross profit, which differentiates it
from net profit. Net profit is calculated using the following formula; ‘Net profit = Total revenue –
Total expenses’. In this case, to calculate net profit over a period of 12 months from 2009 – 2010 is,
£33,000 - £21,400 = £ 11,600. The total net profit generated by Domestic Dogs home is £11,600, and
since it is a positive number, it tells me that Domestic Dogs Homes are currently successful and safe
as they were able to cover all costs as well as attain a profit.
Balance Sheet
A balance sheet is statement of financial position of a firm, it is used to determine where a
company’s financials is currently standing because it lists what a company owns and what it owes.
The balance sheet contains summarized information on a company’s assets. It also shows how the
Net Assets have been financed, for example through share capital or retained profits.
