P5 Unit 2
Introduction
In this task, I am going to interpret the contents of a trading, profit and loss account and balance
sheet for Saira’s computers. I am then going to explain what each of these documents is
showing and talk her through the various components of the accounts.
Financial statements
The Financial Statements are a group of reports that tell a company's financial status at a
certain point in time. The two types of financial statements are the profit and loss account and
the balance sheet.
Profit and loss account
The Profit and Loss Account shows the profit or loss of a business over a given period of time
e.g. 3 months, 1 year, etc. One of the most important objectives of a business is to make a
profit. The profit and loss account shows the extent to which it has been successful in achieving
this objective. Companies are expected to keep their profit and loss accounts in certain formats.
Typically the profit and loss account will show the revenues received by a business and the
costs involved in generating that revenue.
Profit and loss account starts with the gross income (the total of all money that comes in from
the sales to customers), and takes away any discounts or allowances (for example, for early
payment or bulk purchases), giving the net income. From this, the Profit and loss takes away
cost of sales (for example, total unit costs, packaging and delivery), giving you your gross profit.
Then it takes away overheads (sometimes called fixed costs). These include the rent for your
premises, marketing costs, wages, telephone, postage, and stationery etc. This leaves your
operating profit.
You then add in any other income (for example, from machinery sales, rent from tenants in your
office space etc) to give you your profit before tax.
Balance sheet
A balance sheet is a snapshot of your business’s financial position on a given day, usually
calculated at the end of the quarter or year. It is a summary of your company’s assets,
liabilities/obligations, and owner’s financial involvement. A business will generally need a
balance sheet when applying for loans or grants, submitting taxes, or seeking investors. The
balance sheet is one of the most important statements in a company's accounts. It shows what
assets and liabilities a company has, and how the business is funded (by shareholders and by
debt: the financial structure of the company). The balance sheet provides information that is
useful when assessing the financial stability of a company. A number of financial ratios use
numbers from the balance sheet including gearing, the current assets ratio and the quick assets
ratio. However, ratios based on profits and cash flow are at least as important for assessing
financial stability: the most important of these are interest cover and cash interest cover.
Introduction
In this task, I am going to interpret the contents of a trading, profit and loss account and balance
sheet for Saira’s computers. I am then going to explain what each of these documents is
showing and talk her through the various components of the accounts.
Financial statements
The Financial Statements are a group of reports that tell a company's financial status at a
certain point in time. The two types of financial statements are the profit and loss account and
the balance sheet.
Profit and loss account
The Profit and Loss Account shows the profit or loss of a business over a given period of time
e.g. 3 months, 1 year, etc. One of the most important objectives of a business is to make a
profit. The profit and loss account shows the extent to which it has been successful in achieving
this objective. Companies are expected to keep their profit and loss accounts in certain formats.
Typically the profit and loss account will show the revenues received by a business and the
costs involved in generating that revenue.
Profit and loss account starts with the gross income (the total of all money that comes in from
the sales to customers), and takes away any discounts or allowances (for example, for early
payment or bulk purchases), giving the net income. From this, the Profit and loss takes away
cost of sales (for example, total unit costs, packaging and delivery), giving you your gross profit.
Then it takes away overheads (sometimes called fixed costs). These include the rent for your
premises, marketing costs, wages, telephone, postage, and stationery etc. This leaves your
operating profit.
You then add in any other income (for example, from machinery sales, rent from tenants in your
office space etc) to give you your profit before tax.
Balance sheet
A balance sheet is a snapshot of your business’s financial position on a given day, usually
calculated at the end of the quarter or year. It is a summary of your company’s assets,
liabilities/obligations, and owner’s financial involvement. A business will generally need a
balance sheet when applying for loans or grants, submitting taxes, or seeking investors. The
balance sheet is one of the most important statements in a company's accounts. It shows what
assets and liabilities a company has, and how the business is funded (by shareholders and by
debt: the financial structure of the company). The balance sheet provides information that is
useful when assessing the financial stability of a company. A number of financial ratios use
numbers from the balance sheet including gearing, the current assets ratio and the quick assets
ratio. However, ratios based on profits and cash flow are at least as important for assessing
financial stability: the most important of these are interest cover and cash interest cover.
