Like shareholders in a limited company, they are mostly interested in trends in profit because it determines how valuable their part of the business is.
At the end of every trading year a business prepares final accounts. These provide a financial summary of all their trading activity during the year.
The trading account: The trading account shows the gross profit (or loss) that the company has made. Profit is the money made by the business and equals income minus expenses.
The profit and loss account shows the net profit (or loss) made. The Trading account and profit and loss account are often combined as one trading and profit and loss account so that both the gross and net profit can be displayed in the same set of accounts.
The purposes of a firm's Trading account and Profit and Loss account are to calculate and show the gross and net profits. To measure how profitable a business is, percentages are used. This makes it easier to compare one set of results with those of a previous year, or those of a competitor.
Appropriation account- This part shows what happens to the net profit made by the company, part of the net profit will be paid to the government in taxes. The tax is usually cut from the profits the company makes. Another part of the net profit is that the net profit is then divided between the shareholders which will be split between them.
The net profit will go to itself meaning the remaining profit will go to the company so that they can invest the money in their company may be to 3exapnd their business or to make a new product or improving their quality.
The importance of each component of the profit and loss and appropriation account
Profit and loss- the profit and loss account is accounts that are done so that the business can determine what is to happen in the future, for the business in financial terms.
Trading account- the importance of a trading account is that it shows the business activities it has done, as in has the business brought in new stock.
Appropriation account- the importance for this is that it shows all the money that is leaving the money. The money leaving will be the tax and the money for the shareholders.
Task 3
Fixed assets - Shows the current value of major purchases that help in the running of the business, like delivery vans or PCs. In this case it is £40,000. This amount should either allow for depreciation in value, or show depreciation being subtracted on the balance sheet.
Current assets- Shows the cash or near-cash available to the firm. This includes stock ready to sell, money owed to them by debtors, and cash in the bank. Here the amount comes to £30,000.
Current liabilities- Shows the short-term amounts that the firm owes. In this case they may have a short-term loan for £5,000.
To calculate the net current assets, the current liabilities are subtracted from the current assets:
£30 000 - £5,000 = £25,000
This amount is added to the fixed assets value to give the net assets total:
£40,000 + £25 000 = £65,000
Long term liabilities- shows what is owed by a business and the money has to be paid in more than 12 months time to build up a good relationship with their investors and the persons they borrow money from.
Capital and reserves- Capital is the money shareholders have contributed to the company. Reserves are the profits earned and other resources received by the company that have been kept for the benefit of shareholders.
A balance sheet shows the value of a business. It shows what it owns and owes, its assets and its liabilities on a particular date.
Balance sheet accounts is involved with fixed assets and current assets
Assets are things that the company owes and anything that has a value to it.
A balance sheet account is an account that gives you a statement of a business in finance on any date the business chooses to look at.
The main aim of balance sheet is to see the wealth and the value to the company and it shows the assets employed and capital at work in the company it also shows the owners or shareholder how the business is doing whether they are making profit or loss and the organisation can also use the balance to see the data of last year so that they can compare their last year data with their current year data it let them know where the money went who the money went to.The balance sheet is very important for many reasons because it enables different stakeholder to make decisions about the company stability and the ability to pay its debts and the ability to expand their business