Profit And Loss And Balance Sheets Page 21
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26Exercise 3 : Loans And Depreciation
A profit and loss account measures changes to the
value
of things as a result of trading or
carrying out other activities. It does not measure just how much money was earned and
how much was paid. It also measures hidden costs (like
depreciation
of equipment) and
additional costs (like
loan
charges).
Try this exercise.
ABC Engineering makes pipes for the water industry. It owns 4 machines each valued at
£5,000. It’s gross profit in the current quarter was £3,000 but now depreciation of the
machinery must be deducted. It is estimated that each of the machines will last another
10 years.
1 : How much depreciation was there and how does this affect the gross profit?
Value of machinery now
Depreciation
=
Number of periods of life left
2 : Therefore gross profit
=
£3,000
-
?
P 233
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