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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 |