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This guide provides an in-depth overview of profit and loss (P&L) statements and balance sheets, crucial for tracking business expenses, income, and overall financial health. We cover essential components such as costs, overheads, income sources, asset management, liabilities, and shareholders' equity. Additionally, the guide explains how to interpret financial positions, making it easier for business owners to grasp their financial obligations and assess their worth. Learn the significance of cash flow, depreciation, and maintaining balanced financial reports for informed decision-making.
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P/L Costs Overheads • Wages • NI • Rent • Rates – Business & Water • Gas & Electricity • Telephone, ISP • Postage, Printing, Stationary • Advertising • Insurance
P/L Costs …….. • Repairs & Maintenance • Interest Payments • Bank Charges • Depreciation • Travel • Legal • Subscriptions and Periodicals
Sales And Income • Invoice sales • Cash Sales • Interest on deposit
Cash In – Not Sales • Equity • Bank Loan/Mortgage • VAT • These DO NOT appear in profit/loss
Capital Equipment • Capital Equipment does not appear in the P/L • It is taken from the cashflow and the depreciation is treated as a cost in the P/L
Balance Sheet • Snap Shot on a particular date • How much are you worth? • Assets • Fixed Asset • Liquid (Current) Assets • How much do you owe? • Tax • VAT • Creditors • Bank Loans • Shareholders
Balance Sheet • Assets = Liabilities +Shareholders Equity
Shareholders raise £50,000 Cash goes into bank Assets Cash on hand £50,000 Liabilities + Sharehldrs £0 +£50,000 Start up
Sales £10,000 (invoiced) Vat £1750 Purchases £2,000 Assets Receivables £11750 Cash on hand £48,000 Computers £2,000 Total £61,750 Liabilities & Sharehldrs Profit £10,000 Vat £1,750 Shares £50,000 Total £61,750 Trading for a while
Balance Sheet • Assets • Current • Cash • Accounts Receivable • Inventory • Long Term • Fixed or Tangible • Buildings, Furniture, Plant & Machinery • Intangible • Name & Goodwill • Patents • Website
Balance Sheet • Liabilities • Current Liabilities • Accounts Payable • Loan Payment Payable • VAT • Inland Revenue • Long Term Debt • Remainder of Loan
Balance Sheet • Shareholder Equity • Shareholdings • Retained profit
Equation • Assets = Liabilities + Shareholders Equity
Start of Business • Sell shares for £50,000 on day • Therefore balance sheet reads • Assets = £50K • Liabilities + £0 • Shareholders Equity = £50K • £50K = £0 + £50K
Balance sheet month end 1 • Assets £10K in receivables £42K in the bank Liabilities Shareholders Equity = £50K Shares £2K profit
Purchases Month 2 • During Month 2 we purchase £22K of hardware
Balance sheet Month 2 • Assets Receivables = £22K Outstanding invoices Assets = £22k New equipment (no depreciation) Cash = £11K • Liabilities £0 • Shareholders equity Shares = £50K Profit = £5K
Month 3 • Money starts to come in • Depreciation started
Balance Sheet Month 3 • Assets Invoiced £34K, received £5K. Therefore: Receivables = £29K Assets = £21K Cash = £7K • Liabilities £0 • Shareholders Equity £50K Shares £7K Profit
Balance Sheet • (29+21+7)K = (50+7)K Profit Receivables Assets Shares Cash
Remember 1 • Try this by purchasing items on credit to create liabilities • You put how much you owe on the liabilities side and the new item into your assets. • This balances. • When you pay it off you lose the liability on one side and the cash from your asset side.
Remember 2 • Reduce the profit (shareholders equity) by the depreciation to date, balances with loss of same amount on the assets side of the equation. • Balance sheets BALANCE. • Balance sheets run vertically
Example 2 • Shares = £50,000 • Salaries = £8,000 per month • Sales £15,000 per month • Equipment = £12,500 Month 1 using cash • Fixed Costs £4,000
