Statement of profit and loss Vs. statement of Financial Position

Danielle Milton

My text books refers to these two statements but I'm having a bit of trouble getting my head about the ideas. If I'm shown a list of items I'm not sure which statement they would go onto.

Does anyone know of a source that helps explain how these two work and the differences between them? I've tried googling it but the answers seem to be for above AAT level 3 and I've only just finished Level 2 so they're not ideal.

Many thanks,

Sam22

The statement of financial position is the balance sheet. It shows your assets such as cash, receivables, prepaid expenses etc and it shows your liabilities such as accounts payables, interest payable etc. you would subtract your liabilities from your assets to find your working capital.

The Income statement is your profit and loss statement. Here you would see your sales revenue, opening inventory, purchases, less cost of goods sold and closing inventory to show gross profit/loss, less expenses such as rent and rates, bank charges, depreciation, telephone, wages etc etc to show net profit/loss for the year.

Does that help at all? When you start level 3 it'll explain it all and show you examples. It's easier to get your head around when you start looking at the extended trial balance. When I first started it, I would mark each thing with SFP or IS so I could remember where it needed to be shown.

Nps

Think of the Statement of Profit and loss as something which is being added to all the time, and which will affect your profit this year (ie expenses will increase as time goes by, revenue will increase etc). It gives a total for a year, and then starts again at zero next year. It shows where your yearly income and expenditure has come from/gone.

A Statement of Financial position gives a snapshot of the company at that exact moment. How many payables/receivables at the moment, how many assets at the moment, how much cash at the moment. It is not reset to zero at the end of the year as everything will still be in existence next year too (unless assets sold, payables paid etc).

I'm realising that it's actually quite difficult to put into words, all I can say is that with practice, you will start knowing instantly which statements things go into it, and then it will all click into place. Don't worry, you'll get plenty of practice as you progress through the modules! There are actually only a limited number of categories used in AAT, so you'll soon remember which ones go where.

SandyHood

Dear Danielle
This is a fundametal aspect and one well worth mastering.
I'm expecting that there will be plenty of advice and some neumonics to help.

I tend to think of the profit and loss account (now generally called an income statement) as a record of a time period, such as one year.
It shows all the income generated for the business from trading and all the costs that were incurred generating that income. The income less costs gives the profit or loss made over the year.

The statement of financial position is a financial snap shot at a point in time for example 31 August 2013 at midnight. It shows all the assets of the business at that precise time and any liabilities. Assets less Liabilities gives you the net worth of the business (or the capital).

Now look at your list of account balances and try to classify each one:
Is it (a) an asset or a liability - if so it will go into the Statement of Financial Position
Or a (b) an account which recorded income or expenditure incurred generating income?

Typically distribution costs (e.g. postage for an e-bay seller) is an example of expenditure. The cost was incured enabling the sale to take place.
But a book of stamps at the end of the year (which have not been used) is an asset.

If you want, see if you can attach an example question.

beckyln

Hi Danielle,

I remember it this way

DEAD & CLIC

Debit, Expenses, Assets, Dividends

Credit, Liabilities Income, Capital

P&L = Expenses & Income
SoFP - Assets & Liabilities

Hope this helps!