Unit 2
P5: interpret the contents of a trading and profit and loss account
and balance sheet for a selected company
Financial statement
Profit and Loss Account
A profit and loss acconnt is an informatonal statement of a business showing if they have made a
profit or a loss in a year,i it can also be used for longer than a yearr The profit and loss account (also
known as income statement) is used by a business’s financial performance every yearr A profit and
loss statement can be used for more than one thingr For example,i investors at Urban Clothing can
use a profit and loss account to diferentate companies in diferent sectorsr Such as a not-for-profit
and comparing its financial performance with a private Ltd to decide which is worth investng on,i if
another company is doing beter showing on its income statement,i then investors can decide to
change investments to that companyr Another way a profit and loss account can be used in Urban
Clothing can be just for the reason of checking the businesses financial statementr For example,i to
check whether or not Urban Clothing is making a profit or making a loss that yearr It can be used to
improve the way Urban Clothing do things in order to make a profit if they are making a lossr If they
are making a profit and it also shows that on a forecast,i then Urban Clothing can contnue to use
that technique to make a profit or can improve on that technique to make even more profit,i as their
ultmate goal to maximise profitr
Components of Profit and Loss
The gross profit is defined as total amount of revenue made from sales (sales revenne: the total
amount of money made from selling a product or service by a business) excluding the cost of the
sales (the cost of products and/or services a business produces to sell)r This means that the business,i
for example,i Urban Clothing; do not add the cost of producing the goods or services Urban Clothing
sellr It only takes into account the amount of revenue or profit Urban Clothing has made on a gross
levelr This is why gross profit is defined as the total amount of revenue/profit made by a business
excluding the cost of the goods and servicesr Net profit is defined as gross profit minus the expenses
(all of the other cost that is experienced by a business excluding the cost of sales)r This in a business
such as Urban Clothing would be seen as the gross profit of Urban Clothing but not including the
expenses of the business from other costs experienced by a businessr It’s very similar to gross profit
but this tme,i it includes the cost of sales and excludes expensesr The way a business can identfy
what their net profit is by seeing whether or the final financial statement comes out positve or
negatver It the number turns out to be positve,i then the business made a profit and vice versar
Balance Sheet and what needs to equal
A balance sheet,i also known as a statement of financial positon,i is a statement that shown a
business how they are earning capital,i how the business spends and uses the capital and is informs a
business showing them if their net asset and capital employed are equal,i the main aim of a balance
sheet made by businesses is to create and equilibrium of the net asset and the capital employed
within the businessr The main purpose of a balance sheet is to show a business its financial positon
during a certain tmer Urban Clothing is a business that uses this financial statement to see where
they are financiallyr
1
P5: interpret the contents of a trading and profit and loss account
and balance sheet for a selected company
Financial statement
Profit and Loss Account
A profit and loss acconnt is an informatonal statement of a business showing if they have made a
profit or a loss in a year,i it can also be used for longer than a yearr The profit and loss account (also
known as income statement) is used by a business’s financial performance every yearr A profit and
loss statement can be used for more than one thingr For example,i investors at Urban Clothing can
use a profit and loss account to diferentate companies in diferent sectorsr Such as a not-for-profit
and comparing its financial performance with a private Ltd to decide which is worth investng on,i if
another company is doing beter showing on its income statement,i then investors can decide to
change investments to that companyr Another way a profit and loss account can be used in Urban
Clothing can be just for the reason of checking the businesses financial statementr For example,i to
check whether or not Urban Clothing is making a profit or making a loss that yearr It can be used to
improve the way Urban Clothing do things in order to make a profit if they are making a lossr If they
are making a profit and it also shows that on a forecast,i then Urban Clothing can contnue to use
that technique to make a profit or can improve on that technique to make even more profit,i as their
ultmate goal to maximise profitr
Components of Profit and Loss
The gross profit is defined as total amount of revenue made from sales (sales revenne: the total
amount of money made from selling a product or service by a business) excluding the cost of the
sales (the cost of products and/or services a business produces to sell)r This means that the business,i
for example,i Urban Clothing; do not add the cost of producing the goods or services Urban Clothing
sellr It only takes into account the amount of revenue or profit Urban Clothing has made on a gross
levelr This is why gross profit is defined as the total amount of revenue/profit made by a business
excluding the cost of the goods and servicesr Net profit is defined as gross profit minus the expenses
(all of the other cost that is experienced by a business excluding the cost of sales)r This in a business
such as Urban Clothing would be seen as the gross profit of Urban Clothing but not including the
expenses of the business from other costs experienced by a businessr It’s very similar to gross profit
but this tme,i it includes the cost of sales and excludes expensesr The way a business can identfy
what their net profit is by seeing whether or the final financial statement comes out positve or
negatver It the number turns out to be positve,i then the business made a profit and vice versar
Balance Sheet and what needs to equal
A balance sheet,i also known as a statement of financial positon,i is a statement that shown a
business how they are earning capital,i how the business spends and uses the capital and is informs a
business showing them if their net asset and capital employed are equal,i the main aim of a balance
sheet made by businesses is to create and equilibrium of the net asset and the capital employed
within the businessr The main purpose of a balance sheet is to show a business its financial positon
during a certain tmer Urban Clothing is a business that uses this financial statement to see where
they are financiallyr
1
