|
GCSE / Level 2 Revision Notes
Finance - Profit and Loss Account
Profit and Loss Account
The purpose of the profit and loss account is to:
- Show whether a business has made a PROFIT or LOSS over a financial year.
- Describe how the profit or loss arose – e.g. categorising costs between “cost of sales” and operating costs.
A profit and loss account starts with the TRADING ACCOUNT and then takes into account all the other expenses associated with the business.
Trading account
The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year.
An example of the trading account of a business would look this:
Trading account for XYZ plc for the year ended 31 st March 2003
Category |
£ |
£ |
Sales |
|
1,200,000 |
Opening Stock |
150,000 |
|
Purchases |
400,000 |
|
less Closing Stock |
(220,000) |
|
Cost of Sales |
330,000 |
(330,000) |
Other Costs |
|
(70,000) |
Gross Profit |
|
800,000 |
Note that the closing stock figure would appear in the balance sheet under Stock.
Profit and loss account
The trading account now has all the other expenses now deducted.
It would look like the table below:
Trading, profit and loss account for XYZ plc for the year ended 31 st March 2003
|
£’000 |
|
Examples |
Turnover (sales) revenue |
1,200 |
The amount of money
generated by sales |
e.g. 400 cars at £3,000 each |
Cost of sales |
(400) |
The cost of making the
goods or buying them |
Raw materials
Cost of labour working directly on each
product
Cost of running the machines/equipment |
Gross profit |
800 |
Turnover minus cost of sales |
|
Overheads or
expenses |
(320) |
Costs not directly involved in the production process
(indirect costs) |
Cost of premises e.g. rent, insurance, repairs
Office costs e.g. stationery, postage, computer maintenance, staff salaries and wages
Sales and marketing costs e.g. salaries of salesmen, advertising
Finance costs e.g. bank charges, interest on bank loans |
Operating profit |
480 |
Gross profit minus overheads Also known as NET PROFIT |
|
Interest and taxation payable |
(200) |
The money that is due to be paid in interest on loans and to the Inland
Revenue as tax |
Net profit after tax and interest |
280 |
The money available to be distributed to shareholders |
Dividends |
(170) |
Money paid to shareholders as a reward for holding shares |
Retained profit |
90 |
The money left for the business to reinvest |
The business has to pay tax at the rate determined by the government and interest at the rates determined by the lenders. |
