OHT 3.

Measuring and reporting financial

performance
OBJECTIVES
You should be able to:
Discuss the nature and purpose of the profit and loss
account

Prepare a profit and loss account from relevant

financial information

Discuss the main measurement issues that must be

considered when preparing the profit and loss account

Explain the main accounting conventions

underpinning the profit and loss account
Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.2

Profit measurement and the

recognition of revenue

The realisation convention states that revenue

should be recognised only when it has been
realised. Normally, realisation is considered to
have occurred when:

The activities necessary to generate the revenue

are substantially complete
The amount of revenue generated can be objectively
determined
There is reasonable certainty that the amounts
owing from the activities will be received

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.3

Accounting for sales commission

Profit and loss account

Cash flow
statement

Sales commission expense

6,000

Balance
sheet
at year end

Cash 5,000

Accrual 1,000

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.4

Accounting for rent payable

Profit and loss account

Cash flow
statement

Rent payable expense

16,000

Balance
sheet
at year end

Cash 20,000

Prepaid expense 4,000

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.5

Profit measurement and the

calculation of depreciation
To calculate a depreciation charge for a period, four
factors have to be considered:

The cost of the asset

The useful life of the asset

The residual value of the asset

The depreciation method

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.6

Graph of written-down value against

time using the straight-line method

Writtendown
value
(000)

40

30

20

10

Asset life (years)

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.7

Graph of written-down value against

time using the reducing-balance
method
Writtendown
value
(000)

40

30

20

10

Asset life (years)

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.8

Calculating an annual depreciation

charge
Cost
less
Residual value
equals
Depreciable amount

Year 1

Year 2

Year 3

Year 4
and so on

Depreciation

Depreciation

Depreciation

Depreciation

Asset life (number of years)

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition

OHT 3.9

Profit measurement and stock

costing methods

Common assumptions used are:

First in, first out (FIFO)

Last in, first out (LIFO)

Weighted average cost (AVCO)

Pearson Education Limited 2003

Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition