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Understanding your profit and loss account and balance sheet Let us help you
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To steer your company in the financial direction you want it to take, you need to understand where you're making money and where you're spending it. This is why you should keep accounts and produce regular reports, including a profit and loss account and balance sheet. Your bank manager or other financier will also want to see these when you ask for a loan or other credit.
This guide covers:
- The benefits of producing accurate profit & loss accounts and balance sheets
- How to keep a profit & loss account
- How to keep a balance sheet
- Understanding depreciation
- Accounting terms explained
- Computerised accounting
The benefits of producing accurate profit & loss accounts and balance sheets
Your profit and loss account (P&L) shows business performance. It measures how much money you have made, and how you made it, over a given period. Typically, this period is a month or consolidated months over a year.
Your balance sheet shows the value of your business, at a specific point in time (for example, the last day of the month or the end of your financial year). It shows how the profits shown in the P&L have been used.
These records are valuable for many reasons.
- Your bank manager, financiers and prospective partners will want to see clear records of the business' profitability.
- You get a clear view of patterns emerging in the way you do business. By examining accurate monthly figures, for instance, you may be able to identify months when you are busier than others, enabling you to plan staffing and resource levels more efficiently.
- Producing both these reports regularly and looking at them together gives you a wealth of information about how to drive your business forward.
The P&L measures your profitability while your balance sheet measures your financial health - your ability to pay what you owe out of your current resources. Taken together, they indicate your long-term prospects and reveal how you could manage your business better.
It could be that a growing business overstretches itself. A look at the P&L will reveal healthy profit, but will not show you, for example, if you are running out of cash, as you build stock. For this you will need to look at your balance sheet. Working with them together allows you to plot growth and avoid financial perils.
Using ratios to interpret the
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Is accrued income effect Profit and Loss Account?
yes it do effect it should be credited in your profit and loss a/c
What is the effect of free trade?
profit or loss.
What is the difference between charge of profit and appropriation of profit?
Charge:1)Compulsory payment.Recorded even there is loss.2)Entered in Profit & Loss A/C3)Effects Net Profit.4)Done Before All Appropriations.5)Eg: Depreciation, Rent etc.Appropriation:1)Not Compulsory.Not recorded if there is loss.2)Entered in Profit & Loss Appropriation A/C3)Does not effect Net Profit,4)Done after all charges5)Eg: Salary ,Commision to Partner.
How do I calculate simple profit and loss?
Profit or loss = income - expenses. A positive number is profit, a negative number is loss.
Why loss by fire is not included in the operating profit?
Operating Profit = Sales - COGS - SG&A - Other operating ExpensesA loss incurred as a result of a fire would be classified as an Unusual or Infrequent Loss. This would effect NI, but since it is temporary (not part of a company's operations) it would be excluded from operating income/profit.
Do provisions for loan loss go in the balance sheet or profit and loss?
Profit and Loss.
How do I Find the incremental profit or loss?
The incremental profit or loss is the change in profit or loss over the designated time period. After calculating the profit or loss, for example on a monthly basis, the delta between that and the average monthly profit or loss from the prior year can be determined.
What is the difference between profit and loss account and profit and loss appropiation account?
Profit and loss accont is used to calculate the profit or loss of business while profit and loss appropriation account is used to allocate or distribute net income or loss to share holders or different reserves account.
What are the limitations of profit and loss account?
"What are the limitations of profit and loss account?"
What are the Advantages of a profit and loss statement?
what are the advantages of profit and loss statement?
Advantages and disadvantages of trading profit and loss account?
: Profit and loss account gives the actual information about net profit or net loss of the business for an accounting period, Profit and loss account gives the actual information about indirect expenses, Profit and loss account serves to show the ratio between net profit to sales, Profit and loss account helps in showing the ratio between net profit to operating expenses, Profit and loss account helps in controlling indirect expenses
If the income of a business exceeds its costs the money that remains is called the?
profit
