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WORDS - Balance Sheet & Profit and Loss Account
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Balance Sheet Words Accounting Equation Is a useful rule which helps when assembling the balance sheet figures. The rule which is always true is that: Assets - Liabilities = Capital This means that when preparing a balance sheet there will always be two figures which are the same and we refer to this state as the the balance sheet balancing. Fixed Assets + Current Assets -Current Liabilities - Long term Liabilities = Capital + profit - drawings . Accounting ratios Used to help make sense of the figures and include the following categories:
An amount unaccounted for, yet still owed at the year end. The amount needs to be estimated and then added to the expenses deducted from the profit in the Profit and Loss account. The same amount also needs to be added to Trade Creditors in the Current Liabilities section of the Balance sheet. Asset An item of value owned by the business. Balance Sheet A financial statement that shows what the business is worth. This is a very simple definition as the valuation of a business is a very complex topic. It shows the business assets and liabilities at one point in time and is sometimes referred to as the "snap shot". Bank & Cash Amounts held in the bank and in cash. Found in the Current Assets section of the Balance Sheet. If the amounts are in deficit, then the bank account is said to be an overdraft and will not appear in current assets but will be found in the Current Liabilities section of the balance sheet. Capital Items, usually cash or other assets introduced into the business by the owners. Sometimes referred to as Capital Introduced. For companies this is referred to as share capital and Capital Employed is the term given to the total of:
Money. Can be in the petty cash tin in the office or at the bank. Current Asset Assets which are expected to be used up and replaced within one year. Sometimes referred to as short term assets.They can be :
Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Current liabilities can be:
Is the measure of wearing out of a fixed asset. All fixed assets are expected to wear out, become less efficient and to get "tired". Depreciation is calculated as the estimate of this measure of wearing out and is a charge in the Profit and loss Account. Accumulated Depreciation is the total depreciation charges to date deducted from the cost of the fixed assets to show Net Book Value in the Balance Sheet. Drawings Assets withdrawn from the business by the owners. These assets are usually cash but can be any asset withdrawn. In company accounts the withdrawal of assets by the owners is either called :
Assets used within the business and not acquired for the purposes of resale. Examples include:
Accumulated Depreciation must also be shown, which is deducted from cost (or valuation) to give net book value Goodwill Comes in two flavours:
The law controls what kinds of books, records and systems of internal controls that must be maintained by companies which are subject to an annual examination by external auditors. You will learn much more about these in your studies. Long term Liability Amounts owed to someone else which are payable after one year. Examples include:
Sometimes referred to as working capital, this is the difference between total current assets and total current liabilities and is what finances the business on a day to basis. Net Assets Is the difference between the total assets and total liabilities. Profit There are many types of profit:
Reserves Amounts retained in the business and not distributed to owners. Reserves can be:
Amounts invested in a company by its owners. Owners of companies are called shareholders. |
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. Profit and Loss Account Words Accounting Period Is the period under examination and usually refers to a year. We therefore refer to a Profit and loss Account for the year ended so and so or a Balance Sheet as at so and so. Accruals or Matching concept Is the reason why net profit made is not the same as the cash surplus generated. This is a critical concept for you to understand. It is a fundamental concept upon which the accounts are prepared. You will learn in your studies that profit is not cash for a number of reasons:
Referred to as expenditure and including examples such as:
Is calculated by deducting Cost of Sales(sometimes referred to as Cost of goods sold) from sales. Cost Of Sales is calculated by taking:
The method used for preparing accounts which estimates the actual purchase price of all items purchased. This is as opposed to the alternatives which could be to use instead the:
Sales less cost of sales less expenses = net profit. Sales less cost of sales = gross profit. Therefore Net Profit = gross profit less expenses. In other words Net Profit represents the surplus of sales made over expenditure during the accounting period. If a deficit is made(i.e if expenditure is greater than sales) then this results in a net loss and not a net profit. Profit and Loss Account Shows what net profit or loss the business has made within an accounting period after deducting all expenditure from the income. A net profit is earned if total expenditure is less than the sales figure. A net loss is made if it is greater. Comes underneath the Trading Account. Sales Income received or receivable for the accounting period. Sometimes referred to as Turnover.It represents the sales value of goods and services made to customers during the year. Trading account Shows what Gross Profit the business has made within an accounting period. It comes on top of the Profit and Loss Account. Jayne Smith
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