Accounting case study Essays

Accounting case study Essays Accounting case study Essay Accounting case study Essay Dear Mr Han I am writing this letter to explain how the profit and loss account and balance sheet that you have received works. I would like to start off by explaining what the purpose of a profit and loss account is. This makes an accurate calculation of the profit or loss made by the business over a certain period of time. Depreciation in the profit and loss account is the loss in value of the assets in the business over a period of time. For example if there is a car or a van in the business the value of the car will depreciate over the years and will not be worth as much when it comes to selling it. The trading account is the basic process of a business. This shows how much profit the organisation makes by this basic business process, not including other costs that the business may incur. Some things that you would find in a trading account are: * Sales receipts for sales for the year * Sales returns amount paid back to customers when items are returned * Purchases for a manufacturing organisation this is the value of raw materials purchased; for a service business it would be the cost of items bought to sell to customers or used to provide a service to customers. The costs of goods sold are calculated by opening stock + purchases purchase returns closing stock. This is shown on my example profit and loss account. Overheads are things like rent and rates and they do not change throughout the year no matter how much they sell, there is also an example on my profit and loss account. Gross profit is calculated by the net sales cost of goods sold. Net profit is calculated by gross profit all other costs that the business incurs. I would like to explain the different kinds of income and expenditure that businesses incur. Expenditure is any money spent on any costs of the business, such as: * Rent * Wages * Petrol Drawings and the cost of fixed assets are not classed as an expense and do not appear in the profit and loss account. Income is the money that the business is earning for example through sales. Capital income is money or value contributed to the business by the owner to get it started or buy equipment. They can receive money through rent received, which is when a business has a property that they rent out to another business, which then gives them income every month, commission received is when the business may sell a product o a service on behalf of another organisation and then they may receive commission for selling the other businesses products or services. This is an explanation on how you know that the accounts balance. Capital + net profit the amount the owner has paid off = less drawings. So net assets and less drawings are the two figures on the accounts that have to be the same for the account to balance. I hope that this letter has helped you figure out how the profit and loss accounts and balance sheet works. Yours sincerely Hannah Clark