Accounting case study. Dear Mr Han I am writing this letter to explain how the profit and loss account and balance sheet that you have received works.

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Name: Hannah Clark - Year/Group: BTEC National Diploma in Business – Yr1 - Lecturer: Richard Taylor

Unit 5 – Introduction to Accounting

Waters, Gilmour, Mason and Wright

                                                

Floyd House,

Grantchester Meadows,

Oxford,

OX3 5DS

Mr K Han

32 Crookdale Lane,

Ipswich,

IP32 6TY

31 July 2010

Explanation on how the profit and loss account and balance sheet

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:

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  • 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 ...

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