•  Opening stocks
•  Goods purchased for sale
•  Goods returned to suppliers
•  Goods returned by customers
•  Costs of goods sold
•  Total value of sales
•  Gross Profits or Loss

Related: How To Dramatically Increase Sales In A Business

If you analyse the trading account, you can identify products that are selling fast. You can also identify products that do not. Furthermore, you might be able to find out if:

• Some unreliable employees are stealing from your stock
• Your pricing methods are not appropriate
• Your marketing campaigns are not effective
• You are buying stocks from the wrong sources
• Many stock items are destroyed and discarded
• The stock control system is not effective
• Goods are expired and discarded
• There are weak links that are impacting the performance of your trading account.

Related: The Best Products Pricing Methods In Business

Trading Account Ratios

Many useful accounting ratios can be calculated from a Trading Account.

However, not all the ratios can be dealt with in this article.

In the meantime, the most important trading account ratio is the Gross Profit to Sales.

It is calculated thus;

Gross profit divided by total sales multiplied by 100/1.

The result is expressed in percentage (%).

You can compare this ratio to the predetermined mark-up percentage you budgeted.

If the result is less than the budgeted ratio, it calls for investigation.

You can use the ratio to compare industrial benchmarks and to make projections for the future.

Profit And Loss Account

On one hand, it goes further to disclose the incomes of the business from all sources during a specific period, including:

• Income from rents

• Dividends received or receivables•

• Income from investments,

• Profits from assets disposal, etc.

On the other hand, the statement will list the business’s expenses during a specific period, such as:

• Transport and traveling expenses
• Rents paid and payable
• Taxes
• Salaries and wages
• Dividends payable
• Loss on assets/investment disposals
• And so on.

The Profit and Loss statement discloses the net profits earned after deducting all the operating expenses.

However, in a bad business year, it will also disclose the net loss sustained by the business.

If your income statement shows a net loss, it is a red flag for you to take appropriate steps to prevent your business from failing.

Related: How To Manage Your Business Finances Effectively

Benefits Of P&L Account

A Profit and Loss (P&L) account, also known as an income statement, is a vital financial document for any business. Here are the benefits it offers:

Performance Evaluation

The P&L account provides a clear picture of a company’s financial performance over a specific period. It shows the revenue generated, costs incurred, and the net profit or loss, helping businesses assess their profitability.

Decision-Making

By analysing the P&L account, business owners and managers can make informed decisions. It helps identify profitable and unprofitable areas, allowing for better resource allocation and strategic planning.

Identifying Trends

The P&L account helps in identifying financial trends and patterns. By comparing current figures with previous periods, businesses can spot trends in revenue, expenses, and profits, aiding in future forecasting.

Cost Management

Detailed insights into expenses allow businesses to identify and control costs. Understanding which costs are variable and which are fixed can help in cost-cutting measures and improving profit margins.

Investor and Stakeholder Confidence

A well-prepared P&L account builds confidence among investors and stakeholders. It demonstrates transparency and accountability, making it easier to attract investment and secure funding.

Tax Preparation

The P&L account provides essential information required for tax preparation. It helps businesses calculate their taxable income accurately and ensures compliance with tax regulations.

Budgeting and Planning

The P&L account aids in budgeting and financial planning. It provides a basis for creating realistic budgets and setting financial goals, ensuring the business remains on track to achieve its objectives.

Highlighting Areas of Improvement

By examining the P&L account, businesses can identify areas that need improvement. Whether it’s reducing expenses, increasing revenue, or improving operational efficiency, the P&L account offers valuable insights for continuous improvement.

In particular, Investors and lenders will be interested in some operating metrics, such as the:

• Earning per share
• Dividend yield
• Earning capacity
• Financial stability of the business.

Information from the profit and loss accounts can help you, lenders, and your business partners to make better decisions.

In summary, the Profit and Loss account is a crucial tool for evaluating financial performance, making informed decisions, managing costs, and building investor confidence. It provides a comprehensive overview of a company’s financial health, supporting long-term growth and success.

The Balance Sheet

The balance sheet is a crucial financial statement that provides a snapshot of a business’s financial health at a specific point in time.

It helps stakeholders, such as investors, creditors, and managers, understand the company’s financial position and make informed decisions.

It lists the company’s assets, liabilities, and shareholders’ equity, and is crucial for several reasons.

This shows the exact financial position of the business at the end of a specified period:

1. Assets vs. Liabilities

The balance sheet allows stakeholders to assess the company’s solvency by comparing total assets and liabilities.

A strong balance sheet indicates that a company can cover its debts.

2. Equity Position

Equity in the business helps investors understand the company’s net worth and potential for growth.

3. Investment Decisions

Business owners and investors can identify how assets are allocated and whether resources are effectively utilized, helping to make informed growth and investment decisions.

4. Debt Management

Understanding liabilities can guide management in evaluating whether to take on more debt or how to restructure existing obligations.

5. Margins And Ratios

Financial ratios derived from a business balance sheet can be useful for conducting analysis and benchmarking against industry standards.

Here are some of them:

• Current ratio
• Quick ratio
• And debt-to-equity ratio

6. Trend Analysis

By comparing balance sheets over different periods, businesses can identify trends in financial performance and position, which is critical for forecasting future performance.

7. Boosts Investor Confidence

The balance sheet is vital to boost investor confidence.

Investors often scrutinize the balance sheet to assess risk and ensure they are in a financially stable company.

Related: Why Financial Management Is Important To A Business

8. Creditworthiness

Lenders evaluate balance sheets to determine the risk associated with lending to the business, influencing access to credit and the interest rates offered.

9. Legal And Statutory Requirements

Many jurisdictions require businesses to maintain up-to-date balance sheets for legal and regulatory compliance, ensuring transparency and accountability in financial reporting.

10. Valuation Analysis

Balance sheet facilitates mergers and acquisitions.

It provides a basis for determining the company’s value and negotiating terms.

11. Asset Management

By regularly reviewing the balance sheet, businesses can better manage their assets, identifying any that are underperforming or can be disposed of to improve cash flow.

It helps to improve asset and operational efficiency.

Conclusion

In conclusion, Trading, Profit and Loss, and Balance Sheets are essential tools for any business as they provide a comprehensive overview of the company’s financial standing.

By analysing the assets, liabilities, and equity displayed on the balance sheet, stakeholders can assess the business’s ability to meet its financial obligations, evaluate its solvency and liquidity, and make informed decisions.

To ensure transparency, compliance, and long-term success, businesses must maintain accurate and up-to-date balance sheets.