Component of Financial Statement

16th January 2012 34 Mansion road Granchestor meadows Oxford Ox1 6ds Dear Mr Han , I am writing this letter to explain to you the component of your financial statement, this includes the Balance sheet at 31st of March 2011 and the profit and loss account for the year ended in 31st of March 2011 , hope you have a b etter understanding after reading my letter. The Profit and Loss account shows whether your business has made profit or loss , over your financial year.

This also shows how much sales you’ve made and how much loss, it helps you make decisions in the future and improve on your business. You may also view whether you made Profit or loss weekly, monthly but usually it is shows yearly. Revenue Expenditure is the money you spend on items on a day to day basis. This may vary depending on the Business type. Some examples of what may be included is, Premises costs, staff costs, purchase stock. These are the Revenue expenditure from your account.

Rents and Rates – ? 6,000 Wages and salaries – ? 3,920 Advertising – ? 1,500 Telephone and postage – ? 190 Revenue income is the money coming into the business from performing its daily tasks; these also vary on the type of business owned. Some of the examples of revenue income within a business are sales, commission received and also rent received. The revenue incomes from your account are Sales at a cost of ? 63,850. Balance sheet this is a businesses’ net worth at a particular point.

Balance sheet also shows the value of a business as it states what the business owns also known as assets and also known as liabilities. Capital Income is the money that is invested into the business by its owners and all other investors. The money is usually to set up the business, have equipment. It is usually equipment that will stay and be used in the business for a longer period of time an example may be Premises. The capital income of your account is a capital of ? 16,000.

Capital expenditure – These are used to buy capital assets that stay in the business for a long period of time some examples may be , Buildings, Machinery ,Office , Furniture and fittings. Here is the capital expenditure from your Accounts . Equipment ? 13,175 Motor Vehicles ? 2,400 The profit and loss account calculates the amount of profit that is left after the cost of producing goods and service it is then deducted from the amount of sales revenue, this is calculated by sales revenue take away costs of goods that have been sold.

Cost of sales is the value of stock that is used to generate the sales, the calculation for costs of goods sold is Opening stock plus purchases take away closing stock. Net profit is the money left after all the other expenses have been deducted from the gross profit and also any other income that has been added on, this is calculated by adding the Gross Profit to expenses. Fixed assets are the items that a business owns and that will stay for a long period of time , you may see this on a business balance sheet that will include Buildings, Machinery ,Office , Furniture and fittings.

These assets lose their value over a period of time, meaning that after every year the value in the balance sheet is reduced to give affair value of the asset. The fixed assets from your account are Equipment and also Motor Vehicles. Current assets ,are the items of value that are owned by a business whose value is likely to rise and fall irregularly in number or amount on a regular basis ,this also occurs every time the business makes a transaction. Current assets include Stock – ? 7,400 Debtors – ? 150 Cash in the bank – ? 560 Cash in hand – ? 250

Current liabilities –Is what is owned by a business and it should be paid back in less than one year of time the examples are creditors and also overdrafts. The current liabilities from your account are Creditors at ? -1610. Net assets – This shows the total value of the entire assets take away the value of the liabilities. Net assets are calculated by Current assets plus fixed assets take away (current liabilities long term liabilities) the total of your net assets are ? 12,325. Capital employed –This represents the capital investment necessary for a business to function.

Consequently, it is not a measure of assets, but of capital investment: stock or shares and long-term liabilities. It’s the initial capital invested in the business calculated by profit and opening capital being added minus drawings. Capital employed and net assets always have the same /equal answers. After the explanation of showing the purpose of Profit and loss account, explaining and giving calculations and examples I hope it helped you understand, if any questions please contact Yours sincerely.