What Is A Profit And Loss Account

1
What Is A Profit And Loss Account?

• - This is a record of the revenue and costs of a
  business over a period of time, usually a year

2
The Use Of Profit And Loss Accounts

• The Profit And Loss Account shows how much profit
  a business has made over the past year and what
  has happened to that profit
• It is a summary of recent business events and
  shows trends in what is happening to profit
• It is used by the Tax Office to determine how
  much tax a business needs to pay
• The profit and loss account is divided into 3
  parts
• - the trading account
• - the profit and loss account
• - the appropriation account

3
What Is Gross Profit?

• The first part of the profit and loss account is
  the Trading Account. This is a record of the
  sales turnover and cost of sales
• Sales Turnover is the value of the sales of the
  business
• Cost Of Sales is the cost of production including
  raw materials and wages
• Gross Profit is the profit made before the
  overheads (fixed Costs) are deducted
• Gross Profit Sales revenue cost of sales

4
What Is Net Profit?

• The second part is the Profit And Loss Account
• This involves the calculation of Net Profit
• This is the profit after all costs have been
  deducted
• Two overheads which need to be deducted are
  distribution costs eg advertising and
  administration expenses
• Net Profit sales revenue non sales revenue
  cost of sales operating costs

5
What Is An Appropriation Account?

• This is the third part of the Profit And Loss
  Account and shows where the profit goes
• Some has to be paid as tax to the government as
  Corporation Tax
• Some is paid to shareholders as a dividend
• Some profit is Retained ( kept back) for future
  investment

6
What Is Meant By Depreciation?

• Depreciation is the fall in value of fixed
  equipment and buildings over time as they wear
  out
• There are two ways of calculating depreciation
• 1. Reducing Balance Method deduct a each
  year
• 2. Straight Line Method deduct the same amount
  each year