1. First of all, I would like to provide a little bit information about accounting. It is not easy to provide a concise definition of accounting since the word has a broad application within business and applications. The American Accounting Association define accounting as follows: ‘The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
There are two main purposes of financial statements:
1. To report on the financial position of an entity
2. To show how the entity has performed over a particularly period of time.
The most common measurement of performance is profit.
It is important to understand that financial statements can be historical or relate to the future.
The purpose of financial accounting statements is mainly to show the financial position of a business at a particular point in time and to show how that business has performed over a specific period.
The three main financial accounting statements that help achieve this aim are:
(1) The profit and loss account for the reporting period
(2) A balance sheet for the business at the end of the reporting period
(3) A cash flow statement for the reporting period
1. The Profit & Loss Account aims to monitor profit. It has three parts.
1) The Trading Account. This records the money in (revenue) and out (costs) of the business as a result of the business’ ‘trading’ ie buying and selling. This might be buying raw materials and selling finished goods; it might be buying goods wholesale and selling them retail. The figure at the end of this section is the Gross Profit.
2) The Profit and Loss Account proper. This starts with the Gross Profit and adds to it any further costs and revenues, including overheads. These further costs and revenues are from any other activities not directly related to trading. An example is income received from investments.
3) The Appropriation Account. This shows how the profit...