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The top section of a P&L account is known as the trading account for a business that buys and sells items e.g. a
bookshop. What is known as the gross profit is calculated by deducting cost of sales from turnover.
For example:
Turnover is sometimes referred to as sales revenue and is calculated by multiplying the number of items sold by their
average price.
The business obtains the finance for these assets from two main source:
1. Internally (inside the business) from capital raised from the business owners (the shareholders in the case of a
company).
2. Externally - for example, in the form of loans, and other forms of finance which will need to be repaid.
When you set up a business, the business become a legal body in its own right. Internal finance (shareholders' funds) is
owed to shareholders.
External finance is owed to people outside the business - liabilities.
The Balance Sheet will therefore balance because,
In simple terms this shows that the value of a businesses assets is financed by the two groups - 1.Internal (owner's
capital), 2.External (liabilities).
A balance sheet typically appears in a vertical format.
The balance sheet starts off by listing all the assets. Next, come the liabilities. Finally, the owners' capital is shown - to
balance the balance sheet.
This is what a typical Balance Sheet looks like. The components of the Balance Sheet are explained below: