BusinessStudiesOnline:Slide1

The Trading Profit and Loss Account

The Trading Profit and Loss Account
Businessesusuallycalculatetheirprofitlevelby
creatingaTradingProfitandLossAccount(TPL)
TheTPLisproducedbecause:
Itisalegalrequirement
Itsummarisesalltheyearstransactions
Itshowsthefinancialhealthofthebusiness.
Canbeusedtocomparetradethisyearwithtradelastyear
BusinessStudiesOnline:Slide2
The Parts of A T,P&L Account
The Parts of A T,P&L Account
Thedocumentismadeupof3sectionswhichmustbe
completedinturn:
The Trading Account
This calculates gross
profit. It takes the
direct costs of
production away from
the sales revenue
The Trading Account
This calculates gross
profit. It takes the
direct costs of
production away from
the sales revenue
The Profit & Loss
Account
This takes the
expenses (indirect
costs) away from the
gross profit to
calculate net profit
The Profit & Loss
Account
This takes the
expenses (indirect
costs) away from the
gross profit to
calculate net profit
The Appropriation
Account
This shows what will
happen to any profit
that has been made. It
usually refers to
dividends and taxation
The Appropriation
Account
This shows what will
happen to any profit
that has been made. It
usually refers to
dividends and taxation
BusinessStudiesOnline:Slide3
The Structure of a TP&L Account (1)
The Structure of a TP&L Account (1)
TradingProfitandLossStatement
ForLouPole,yearending31.08.04

Sales 400,000
LESSCostofsales
OpeningStock 100
Purchases 100,000
100,100
LessClosingStock 100
Grossprofit 300,000
Sales, the
money from
selling goods
Business
Name and
Date
Calculated by
subtracting
cost of sales
from sales
Value of stock
owned at the
start of the year
Value of raw
materials
purchased
during the year
Value of stock
left at the end
of the year.
This will be
next years
OPENING
STOCK
100,000
Need to calculate
how much it has
cost to make the
goods that have
been sold
BusinessStudiesOnline:Slide4

Grossprofit 300,000
LESSExpenses
Salaries 75,000
Rent 25,000
Other 14,000
Totalexpenses
Netprofit 186,000
CorporationTax 74,400
Profitaftertax 111,600
Dividends 5,580
Retainedprofit 106,020
Expenses
listed and
a total
given
Calculated by
subtracting
expenses from
Gross Profit
114,000
Calculated
by
subtracting
tax from
net profit
Calculated by subtracting dividends.
This is the amount of money that will be
kept in the business
The Structure of a TP&L Account (2)
The Structure of a TP&L Account (2)
BusinessStudiesOnline:Slide5
Different Types of T,P & L Accounts
Different Types of T,P & L Accounts
TheT,P&LAccountsofbusinesseswilldifferaccording
totheirlegalstructure
Companies(Ltds&Plcs)aresubjecttomorelegal
constraints:
TheAccountsOfIncorporatedBusinesses
Accountsmustbepublished
Accountsusuallyshowfiguresfor2
years
Theymustshowhowtheprofitisbeing
used(AppropriationAccount)
BusinessStudiesOnline:Slide6
The Limitations Of T,P & L
The Limitations Of T,P & L
Thetrading,profit&lossaccount
isahistoricalviewofthebusiness
Itdoesnottelluswhatwillhappen
inthefuturealthoughitmayhelp
toidentifytrends
Businessesmaymanipulate
accountsinordertoreducetheir
taxliabilities,ortodeterapotential
takeover
BusinessStudiesOnline:Slide7
Working Capital
Working Capital
Workingcapitalreferstothematerialsthatabusiness
needsinordertomaketheproductsthatitsells
Withoutworkingcapitalabusinesswouldbeunableto
operate
Itistheworkingcapitalthatproducesprofitandassuch
itisreferredtoasaninvestment
However,workingcapitalitemsareNOTintendedtobe
keptbythebusiness
BusinessStudiesOnline:Slide8
How Money Works In Business
How Money Works In Business
Moneyconstantlygoesroundabusinessinacycle
Thiscanbeshownasfollows:
BusinessStudiesOnline:Slide9
The Speed of the Working Capital Cycle
The Speed of the Working Capital Cycle
Iftheamountofcashattheendofthecycleisbigger
thanthatatthestartthenafirmwillmakeaprofit
Howmuchprofitdependsuponhowquicklytheycan
getroundthiscycle.
Howquicklyitcangetrounddependsontwofactors:
SpeedofThe
WorkingCapitalCycle
Creditors
People a business owes money to.
They speed up the cycle
Debtors
People who owe the business money.
They slow down the cycle.
BusinessStudiesOnline:Slide10
Theworkingcapitalofafirmiscalculatedasfollows:
WorkingCapital=CurrentAssetsCurrentLiabilities
Where:
CurrentAssets=
Anythingabusinessowns,whichitintendstosell
Examplesincluderawmaterials,stock,debtorsandcash.
CurrentLiabilities=
Anythingthatabusinessowes,whichmustbepaidwithinthe
next12months
Examplesincludecreditors,overdraftanddividends.
ThiscalculationispartoftheBALANCESHEET
Calculating the Working Capital
Calculating the Working Capital
BusinessStudiesOnline:Slide11
What is a Balance Sheet?
What is a Balance Sheet?
ABalanceSheetisafinancialstatementwhich
showstheASSETS,LIABILITIESandCAPITALofa
businessonaparticulardate
Assets
Are items owned
by the business or
owed to the
business
Assets
Are items owned
by the business or
owed to the
business
Liabilities
Are amounts owed
by the business
Liabilities
Are amounts owed
by the business
Capital
Is the money
invested by the
owners or
shareholders
Capital
Is the money
invested by the
owners or
shareholders
BusinessStudiesOnline:Slide12
The Key Principle of a Balance Sheet
The Key Principle of a Balance Sheet
mustequal
All Assets
All Liabilities
Businessescanonlyspendmoneythattheyeither
have,orhaveborrowedthen:
BusinessStudiesOnline:Slide13
The Structure of a Balance Sheet (1)
The Structure of a Balance Sheet (1)
BalanceSheet
ForA.B.HiveLTDasat31December2004
Fixedassets
Building 170,000
Equipment 60,000
230,000
Currentassets
Stock 30,000
Debtors 10,000
Cashatbank 5,000
45,000
Business
Name and
Date
Fixed Assets
are listed and
then added up.
Current Assets
are listed and
totalled
BusinessStudiesOnline:Slide14
The Structure of a Balance Sheet (2)
The Structure of a Balance Sheet (2)

Currentliabilities
Tradecreditors 25,000
NetCurrentAssets
ORWorkingCapital
LessLongTermLiabilities
Mortgage 45,000
Loan 5,000
NetAssets 200,000
Current Liabilities
listed and totalled
Calculated by
current assets
current liabilities
Long Term
liabilities
are listed
and
totalled,
then taken
away
Calculated by fixed
assets + working
capital long term
liabilities
20,000
50,000
BusinessStudiesOnline:Slide15
The Structure of a Balance Sheet (3)
The Structure of a Balance Sheet (3)
FINANCEDBY:
Capitalandreserves
Sharecapital 75,000
Profitandlossaccount 125,000
TotalCapitalEmployed 200,000
This section shows
where the money in the
business has come
from.
This means that
200,000 has been
invested in the business
BusinessStudiesOnline:Slide16
Boththebalancesheetandtheprofitandloss
accountshowthehealthofthebusiness
Allthestakeholderswillbeinterestedinthebalance
sheet,butespecially:
Shareholders
Customers
Suppliers
Employees
WhenusedwiththeTradingProfitandLossaccount
itshowshowwellthebusinessisdoing
Who Uses A Balance Sheet?
Who Uses A Balance Sheet?
BusinessStudiesOnline:Slide17
The Limitations Of The Balance Sheet
The Limitations Of The Balance Sheet
Assoonasitisproduceditisoutofdate
Fixedassetsmaybeovervaluedifthey
aredepreciatedincorrectly
Businessesarenotrequiredtoinclude
intangibleassetssuchasbrand
names.Thiscanunderstatethevalueof
thecompany
Companiestendnottogivea
breakdownofthefigurestheyjust
quotetotals
BusinessStudiesOnline:Slide18
Differences In Accounts
Differences In Accounts
Differenttypesofbusinessproducedifferenttypesof
accounts,duetolegalrequirements:
Unincorporated
Businesses
Must produce
accounts for
taxation purposes
Are usually in a
simple format
T, P & L A/C will
not have an
Appropriation
Account
Incorporated
Businesses
Must publish
accounts
Often abbreviated
so competitors get
limited
information
Usually show 2
years figures
Some terminology
is changed
BusinessStudiesOnline:Slide19
Thereisabigdifferencebetweensharecapitaland
loancapital:
Share Capital Vs Loan Capital
Share Capital Vs Loan Capital
ShareCapital LoanCapital
Thetotalamount
investedinabusiness
byshareholders
Notethatsharecapital
isNOTthesameas
Shareholdersfunds
Ismediumlongterm
financeprovidedby:
Banks
Debentures
Otherlenders
BusinessStudiesOnline:Slide20
Share Capital Vs Shareholders Funds
Share Capital Vs Shareholders Funds
Anyprofitsinvestedinabusinessbelongtoits
shareholders
AssuchShareholdersfundscanbecalculatedas:
Shareholders Funds = Share Capital + Reserves