Profit and loss

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The most common method of obtaining money for a short period of time is to use an overdraft facility with a highstreet bank. This is were a firm can withdraw money from its account which is does not have. Money can be withdrawn up to an agreed limit and interest is paid on the amount owed. This is known as going overdrawn. Discounting bills is another way of obtaining short-term finance. This is where bills of exchange which are similar to bank cheques are cashed by a merchant bank before a given date. This is useful as the merchant bank will give the business the cash before the actual date of settlement. However the merchant bank will charge a fee.

A firm can also approach a venture capital company, this is an organisation who will provide a business with a cash injection in return for a share holding in the business. This is a form of risk lending as it can not be known if the business will do well or not. A method of long-term borrowing is to issue debentures to the public. This is were the debenture holder lends money to a firm for a fixed period of time at a fixed rate of interest. At the end of the fixed period of time the lump some is paid back to the debenture holder plus the interest. The conditions of the loan are set out in a legal document called a debenture.

Another method of long-term finance is for a business to mortgage land or property, this can last many years and can be done with a highstreet bank. When undertaking a mortgage you are borrowing money on the value of an asset. Government grants are a source of finance available to some firms depending on the type of goods or services the business offers. An example of a grant is the Enterprise Allowance Scheme for new business’s in selected areas of high unemployment.

Another possible way of raising capital is for a business to change its structure. This may involve a large firm becoming a Public Limited Company and selling shares to the public on the stock market. Investors will invest on the basis that they will receive a return on their investment known as dividends which will be deducted from the firm’s net profit. Alternatively a sole trader may wish to take on partner who will invest capital into the business. However changing the structure of a business is a major decision and should be considered carefully.

Profit and loss

A profit and loss account is a record of past costs and revenues over a given time such as a year. It shows the money that has come into the business and left the business over the past year to give the total net profit the business has made. Once the net profit is calculated you can compare your business to other similar ones. It is used as a summary of recent business events for possible investors and the owners, it can be used when making important decisions within the business.

The profit and loss account consists of credits and debits. Credits include things such as commissions and interest received. Debits include all expenses losses and costs of the business. The profit and loss account can be split into 3 parts: the trading account, the profit and loss account and the appropriation account. The trading account The trading account shows the gross profit of the business. Gross profit is the profit the business has made before all the business’s overheads have been deducted e.g. wages, operating expenses and depreciation, which is when an asset reduces in value over a period of time.

Gross profit = Sales turnover – cost of sales The profit and loss account The profit and loss account involves calculating the net profit. Net profit is the profit a business has made after all costs have been taken into account. Net profit = Gross profit + non-sales revenue – operating costs Non-sales revenue is revenue which is received on the sale of assets and on interest received from money deposited in banks elsewhere.

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