Sample question

You may be given questions on the accounts of a company like Go Faster Sports, a high-street retail outlet.

The first part of the accounts is the trading account. Make sure you understand the following business terms:

Turnover [Turnover: Total revenue or income from sales ie all the money a business receives from selling goods or services. ] shows the amount of revenue earned by the firm through the sale of goods at the marked up price [Marked up price: The price after the company has added its own profit margin on top of the cost of producing the goods. ].

Cost of sales shows how much they have spent on buying the goods at cost price before the firm has added its own profit margin. It is divided into three sections:

1. Opening stock is the value of stock remaining unsold from the previous year.
2. Purchases are the amount spent on new stock during the current year.
3. Closing stock is the value of stock left unsold this year to be carried forward.

The opening stock and purchases are added together and then the closing stock is subtracted to give the cost of sales total of £100,000. This amount is then subtracted from the turnover of £200,000 to give a gross profit of £100,000.

The account then continues with the profit and loss account. It shows the rest of the annual expenditure which is the normal cost of running a business, plus depreciation [Depreciation: Loss of value through wear and tear. ] and bad debts [Bad debts: Amount owed to a firm by a customer that won't be recovered. ]. These are deducted from the gross profit to give the true profit: the net profit [Net profit: Gross profit minus expenses (eg wages, rent, rates, advertising etc) leaves net profit. ].

Depreciation is an estimate of the loss in value of major assets [Assets: Everything a firm owns. ] like vehicles, furniture and machinery through wear and tear. This is useful to know for resale purposes.

Bad debts represent the amount of money written off through goods sold on credit which will never be paid for.