Adequacy of Profit & Loss and Balance Sheet as reports

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A) THE ADEQUACY OF PROFIT & LOSS AND BALANCE SHEET AS REPORTS HIGH LIGHTING BUSINESS SITUATION

  1. Why the adequacy Profit and Loss Account as report business situation

Before the profit and Loss Account prepared, businesses prepare the Trading Account. In the trading account businesses only get the gross profit or gross loss, but this is not actual profit or losses. Further step businesses have to prepare the Profit and Loss Account.

The businesses prepared the Profit and Loss Account is to calculate all the expenses and gain of the business. It’s easily for the businesses to understand in this Profit and Loss Account where all the expenses and the gain are summarized in this account.

All expanses are written down in this account like transport cost, salaries, rent and other expenses. That mean businesses know what they have expanse during the operation of the business and immediately know all the expanses they have expand.

For example of expenses:

  1. Rent = $10,000 / month
  2. Transport cost = $500 spend in a month
  3. Salaries = $6,000 for all workers in a month

The total of rent, transport cost and salaries for that month is $16,500. $16,500 is the total cost of expanses the business spends during that month. Immediately the firm knows how much they have spent during that month.

From the gain it includes the gross profit or gross loss that brought down from Trading Account plus all the revenue or income but not include sales. The commission, rent received and interest received are example of gain.

For example of gain:

  1. Gross Profit = $40,000
  2. Commission = $300
  3. Interest received = $400

The total gain during that month is $40,000 + $300 + $400 = $40,700

From here we will know the actual profit or loss. To get the actual net profit / loss, we have to calculate where we have to deducted all the expanses (total expenses) from all the gain (total gain).

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Total cost of expanses during that month is $16,500 and the total gain is $40,700. Let us calculate either the business getting the profit or losses.

The actual net profit / loss : $40,700 - $16,500 = $24,200

If the business get the negative value, it mean the business not getting profit and have to adjust all the expanses which one have to reduce or have to improve the sales. In other situation, if business get positive value, it means the business get the profit so maybe the business has to plan how to get more profit in ...

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