Essay on P4 unit 5

P4 – explain all the components of profit and loss account and the balance sheet of Alfresco
Ayub Mohamed
22 banter road
Stingham Avenue
Forest green
London
N13 5MT
24th June 2010
Alfresco
32 Crookdale Lane
Ipswich
IP32 6TY

In this task I will be explaining the contents of trading and profit and loss account and a balance sheet for the Tottenham clothing company.
Every company have to produce financial statements each year. There are 2 main financial statements which are trading and profit & loss account. A profit and loss account can be updated very often and demonstrates how much profit or loss a business is making.
Profit can be made in several ways e.g. trading in high street shops for example Tottenham clothing company, buying and selling items such as clothes.
A trading profit and loss account is a summarised report that indicates a company's revenues, expenses and net profit during a period, as well as significant accounting policies and calculation assumptions that a company uses in preparing this report. Also known as an income statement, this report informs top management and investors about business trends.
Businesses produce this financial statement to provide the banks and investor’s information on whether they should lend or invest in the business, it is to see whether it’s worth investing in and whether it is a risk. It also helps business to use projected profit and loss accounts to help them to plan their finances, this can help with budgeting.
The trading profit and loss account is made up of three sections, starting with the total sales, then the cost of sales and finally the expenses. After all calculations are made it will give you the net profit or loss of the business.

Sales
The total sales figure is determined after returns inwards have been subtracted, the formula is quantity multiplied by price of the product. Returns inwards is when customers have returned products which may be faulty or due to a change of mind.

Alfresco store’s calculation to determine their total sales is, Sales (£63,850) – Returns Inwards (£250) = net Sales (£63,600). Returns inwards have been deducted from the sales figure because this is the customers who have purchased products returning them for a refund which reduces the amount of money made in sales.

Cost of Sales
Cost of sales involves making the product or getting it ready to sell during a period of time, this includes all direct costs. The cost of sales calculation is cost of sales = opening stock + purchase. Some of these may not take effect in some businesses and therefore they will not be present in the profit and loss account. For Tottenham’s clothing and design store the cost of sales calculations:
Opening stock (£7,700) + purchases (£35,700)-closing stock (£7,400) = Total cost of sales (£36,000). £36,000 is the total cost of sales.
The opening stock is the remaining stock from the previous year, which is £7,700. This stock will be sold first and therefore it is a cost for the company.

Purchases are the new stock which has been bought to sell in the business and therefore it is a part of cost of sales. Returns outwards is the stock that is returned by the business to its supplier, this may include faulty stock as it has not been used it must be deducted as the business will receive it money back. The purchases figure is £35,700.
Closing stock is the amount of money that a business has before the end of reporting period. Whereas, less purchases return is the goods or service returned to the seller.
Gross Profit
The gross profit is the sales minus cost of sales so Alfresco’s calculation, net sales (£63,600) – cost of sales (£36,000) = Gross profit (£27,600). The gross profit is the profit the business has made before expenses are deducted. In some cases the company may receive discounts from suppliers therefore this

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