Accounts

Final accounts comprise of 2 main documents a Profit and Loss Account and a Balance Sheet. One (the profit and loss account) comprises of the income, expenses and profit whilst the other (the balance sheet) comprises of the asset, liability and capital.

During this section, we might use a few terms you are not familiar with so I’ve given you some explanations below

Profit and Loss Account– A statement of the business income and business expenditure used to calculate the businesses trading profit

Income– Is the total value of all sales in the business

Expense- Are costs directly spent in the course of the trading activities of a business (excluding direct costs)

Profit– Is a calculation of profit after taking all expenses of the business from the income

Balance Sheet– A statement showing the financial position of a business at a given date.

Fixed Asset– Is an asset of a business which is expected to last a year or more split into tangible and intangible

Asset– Is something the business has that is of value this might be a fixed asset or a current asset (we will break these down in a later section)

Liability- A debt of the business (usually split into Current Liabilities and long-term liabilities (we will
break these down in a later section).

Capital Account–Is a summary of the owners’ equity in a business

Chart of Accounts
I have listed below a chart of accounts for a sole trader business showing where it appears on a set of accounts (Profit and Loss or Balance Sheet) also the effect of a debit and effect of a credit on the balance within the account.

This should help with the next few sections (especially for those of you with no prior bookkeeping knowledge)


 

PROFIT AND LOSS ACCOUNT

Income

This
details all the income and sales of the business it’s a Credit balance and
when VAT registered it shows the Net value of the sales

Opening
Stock

The
Stock value at the start of the accounting period. This is a Debit.

Direct
Costs (or cost of sales)

The
expenses incurred by the business directly attributable to its trading
activity, so for example a garage that repairs cars would have the cost of
parts fitted to customers cars, the cost of any subcontractor that works on
customers cars (i.e. an auto electrician, the garage doesn’t employ their own
so the brought in a self-employed auto electrician) the mechanics wages this
is a debit balance and when VAT registered it shows the Net value of the
Direct Costs (or cost of sales)

Closing
Stock

The
Stock Value at the end of the accounting period. This is a Credit.

Gross
Profit

The
Income (or sales) minus the Direct Cost (or cost of sales) minus opening
Stock plus Closing stock the Gross Profit is a credit balance (if you ever
see a debit balance it means the business has spent more on buying what it
sells than it sold it could be the stock in hand at the start or end of the
year is incorrect, you may have entered something in Income or Direct costs
incorrectly but this must be investigated.

Expenses
(or overheads)

These
are the running costs they will be sometimes called fixed costs as they do
not fluctuate with sales to the same degree that Direct Costs do this is a
debit balance and when VAT registered it shows the Net value of the Expenses
(or overheads)

Net
Profit

 

The table above shows a description of the various headings on a profit and loss account.

Let’s see an actual Profit and loss account and you can see how the figures relate to the table above.

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