Profit and loss account

Closing the Books At the end of the accounting period, the individual accounts are closed by balancing each in accordance with Eq. (9-126). The balances are transferred either to the balance sheet in the case of capital expenditure or to the income statement in the case of revenue expenditure. An alternative name for the balance sheet is the position statement the income statement is also caUed the trading and profit-and-loss account. 

Let us consider plant eqmpment costing I million and purchased on Jan. I, 1988. T le 9-18 ows the provision for the depreciation account for 1988, 1989, and 1990 for straight-line depreciation, assuming a service hfe of 10 years and zero scrap value. The credit entries of 100,000 for the depreciation in each year are balanced by the depreciation charge of 100,000 debited to the income statement (or trading and profit-and-loss account) in each year. Table 9-19 shows the corre-... 

An income statement or profit-and-loss account gives the net annual profit A vp before tax. In order to assess the annual cash income Ac, as a source of funds from the value of the net annual profit A vp given in the income statement, it is necessary to add back all noncash expenses such as the balance-sheet annual depreciation charge Abd-This practice sometimes erroneously suggests that depreciation is a source of funds, whereas cash income is the only source of funds. 

After the balance sheet and the income statement or profit-and-loss account, the funds statement is generally regarded as the most important financial document. However, many financial managers regard a statement showing changes in cash as being of equal importance. 

General Considerations Manufacturing costs are best considered in the context of the manufacturing, trading, and profit-and-loss accounts. Typical examples of these are shown in Tables 9-3.5, 9-36, and 9-37, respec tively. These are based on the conventional accountancy period of 1 year. 

The ratios which follow are illustrated by reference to the following balance sheet and profit and loss account. 

Although only the third came to be formally published, it is worth while mentioning the studies by Craz-Roche and Alonso52 and Cruz-Roche53 54 analysing the cost structure and profit and loss accounts of Spanish pharmacies, their remuneration systems, their monopoly on dispensing, employment and the professional situation of pharmacists. 

Given the high complexity of the operation, one of the most important factors in achieving the full impact of any improvement process is a rigorous control system that enables production managers to follow up with full and timely implementation of all the necessary measures, and to identify the bottom-line impact on the profit and loss account. 

Finances Investments Securities outstanding Balance sheet Income account Profit and loss account... 

The arranger should obtain a comfort letter from the auditors to the issuer confirming that all financial information presented in the offering circular has been correctly extracted from the audited financial statements and that there have been no adverse changes in specified financial items since the last financial year end, in the case of balance sheet items, or when compared with the corresponding period in the last financial year, in the case of profit and loss account items. 

The Companies Act 1985 requires all hmited companies to produce annual accounts and to give a copy of them to the Registrar of Companies for filing the public has access to these files. The Companies Act further requires that the company accounts should include a balance sheet, a profit and loss account and an auditor s report. It also requires the disclosure of a substantial amount of supplementary information. Companies which fall below certain size thresholds are exempt from some of these provisions. As mentioned in Section 2.2.3, companies whose shares are traded on a stock exchange are also subject to disclosme rules imposed by the stock exchange these requirements are more stringent than those imposed by the Companies Act. 

A profit and loss account (usually called an income and expenditure account in the case of non-profit making organizations) shows what has happened to an organization s financial position over a period of time—usually, again, the organization s financial year it records the money received and the money spent. Table 3.8 shows such an account for our imaginary student. It is important to observe that the excess of expenditure over income, that is, the amount that the student has overspent, is the same as the difference in his net worth between 1998 and 1999. This will usually be the case in simple situations where there has been no capital investment. In more compUcated cases, particularly with commercial organizations, other items enter into the relationship. 

Some explanation of the depreciation item is required. The net figure at the bottom of the profit and loss account should reflect the extent to which the organization—or, in this case, the individual— is better or worse off at the end of the year than at the beginning Clearly, a fall in the valne of the assets tends to make it worse off. Depreciation, althongh it is not an expenditure in the sense that cash is paid ont, reflects this decline and is therefore shown as an expenditure. 

Although the same basic idea imderlies a commercial profit and loss account, its appearance is very different from the one above. Table 3.9 shows an example for our fictitious computer services company. Just as with the balance sheet, we see that items have been aggregated into very broad categories the notes to the accoimts will usually provide more detail. A package... 

Table 3.9. Profit and loss account for a services company (COOG).

The most important of the new statements is the cash flow statement. As we have already pointed out, the income and expenditure account does not show expenditure on capital items, only their depreciation capital expenditure affects the balance sheet but the balance sheet does not give sufficient information to deduce how much this expenditure amounts to and how it was funded. The link which ties the balance sheet and the profit and loss account to the capital expenditure is the cash flow statement. A moment s examination of our student s financial statements will reveal that, because there is no cash flow statement, there is no explanation of where the money to purchase his CD player came from. 

Table 4. Profit-and-loss account of the supermarket industry for all products andforfresh vegetables...

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