Profit and Loss Account

The purpose of the profit and loss account is to:

Compares one year with another

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 has three sections

the
trading account - sales cost of sales = gross profit
the
profit and loss account - gross profit overheads = Net profit
the
appropriation account - looks at how the net profit was used


Trading account

The trading account shows the income from sales and the direct costs of making those
sales.

An example of the trading account of a business would look this:

Trading account for XYZ plc for the year ended 31st March 2003




Sales 1,200,000
Opening stock 150,000
Purchases 400,000
Less closing stock (220,000)
Cost of sales 330,000
Gross profit 870,000

Sales = price of product x number of sales

Opening stock = the value of the stock left over from the previous year
Purchases = the value of the stock that has been bought in the year
Closing stock = the value of the stock left over at the end of the year.
Cost of sales = the value of the stock purchased closing stock therefore

Cost of sales = opening stock + purchases closing stock

Profit and loss account

The trading account now has all the other expenses now deducted.

Other expenses inc:-

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


Sales 1,200,000
Opening stock 150,000
Purchases 400,000
Less closing stock (220,000)
Cost of sales 330,000
Gross profit 870,000
Expenses
Net profit (370,000) 500,000

Appropriation account
Shows how the net profit was used

Uses include:
- Pay tax
- Dividends
- Retained profit



Sales 1,200,000
Opening stock 150,000
Purchases 400,000
Less closing stock (220,000)
Cost of sales 330,000
Gross profit 870,000
Expenses 370,000
Net profit 500,000
Tax 200,000
Dividends 170,000
Retained profit 130,000