Profit And Loss And Balance Sheets Page 23
ADVERTISEMENT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26Exercise 4 : Dealing With Loans In A Profit And Loss Account
It is very easy to treat loan repayments as part of the cost of the business. After all, money
is going out of the bank account, isn’t it?
In fact, a loan is
not
treated as part of the profit and loss account. But the
cost
of a loan
(interest and service charges) is. This is because making a monthly repayment hasn’t
really affected the
value
of your activities. But paying interest (which is a cost to the
business) does.
Try this exercise.
ABC Engineering makes pipes for the water industry. It’s
gross profit
in the current quarter
was £3,000 but now it must make a loan repayment. It currently has loans worth £15,000
and must repay £625 per month and pay interest and service charges of £175 per month.
1 : What would ABC Engineering's net profit be after deducting these costs?
Suppose ABC Engineering renegotiated its loan so that it was repaying £15,000 over 5 years
instead of 3 years. Repayments would now be £417 and interest and service charges £183
per month.
2 : What would ABC Engineering's net profit be after deducting these costs?
P 235
ADVERTISEMENT
0 votes
Related Articles
Related forms
Related Categories
Parent category: Business