Page 135 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes 9.1.4 Profit and Loss Account

The profit and loss account shows the profit that the business makes. This is also known as the
“Trading, Profit and Loss Account”. It is made up of the following components:

Sales
Direct Costs
Gross Profit

Indirect Costs
Net Profit
Taxation
Director’s Drawings
Investment in Business
The profit and loss account is opened by recording the gross profit (on credit side) or gross loss
(debit side). For earning net profit a businessman has to incur many more expenses in addition
to the direct expenses. Those expenses are deducted from profit (or added to gross loss), the
resultant figure will be net profit or net loss. The expenses which are recorded in profit and loss
account are ailed ‘indirect expenses’.

Preparation of Projected Financial Statements
Projected financial statements provide assumptions about a given company’s financial situation
in the future, whether it is an annual or quarterly projection. Preparing projected financial
statements is a lengthy task, as it requires analysis of the company’s finances, reading previous
budgets and income statements, and examining the company’s current financial situation to
make assumptions about the business’ financial potential. The process is the same for smaller,
sole-proprietor businesses and well-established corporations.
When preparing the projected financial statements, there are some common pitfalls that need to
be avoided:
Don’t prepare an over ambitious or unrealistic projection. It is better to prepare a
conservative projection and be able to exceed your plan than it is to prepare something
unrealistic and have to explain to investors why you were unable to achieve projected
results.

Don’t be creative in developing your presentation of the projections. Use prescribed
industry standard formats that meet Generally Accepted Accounting Principles.

Be sensitive to the amount of detail that is presented and avoid the use of technical terms.
Give the reader the proper amount of detail to make a decision.
Facts and extensive research should back all assumptions used in the projections. This
makes your projections more believable.
Fully disclose information on all issues relating to contracts, ownership, offering price,
stock options, warrants, related party issues, risks and uncertainties. Don’t mislead the
reader.

130 LOVELY PROFESSIONAL UNIVERSITY