The profit & Loss Account Made easy

Profit & Loss accounts are ALWAYS set out in the same way Profit & Loss accounts are ALWAYS set out in the same way. You must learn this, and then it is easy to answer questions on them.

SALES TURNOVER 105,000,000 This shows how much the firm has sold during the year, & is always the starting point.

SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 You now subtract the cost of actually making the goods. This is the cost of goods sold. It is shown as a total. But is worked out as follows…

How much raw materials you’ve got left over from last year Opening stock 12,000,000 + Purchases 58,000,000 70,000,000 Closing stock 5,000,000 65,000,000 How much stock you bought in the year. Unsold stock at the end of year

Sales minus cost of goods sold = Gross profit. SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Sales minus cost of goods sold = Gross profit.

Expenses include things SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Less Expenses 15,000,000 Next you subtract the general expenses of a business. In published accounts they will be a total, but for internal use they will be itemised Expenses include things Like: Advertising; heating; wages; insurance; office; transport. The list is endless. It does not include purchasing of assets.

One of the things included in expenses is depreciation One of the things included in expenses is depreciation. This is profit put aside to replace old and knackered machinery. More on this anon.

What’s left is called operating profit. Or net profit. SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Less Expenses 15,00 ,000 0 Operating profit 25,000 ,000 What’s left is called operating profit. Or net profit. Or profit before interest & tax

Next, we take off any interest the firm has to pay. SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Less Expenses 15,00000 ,0 Operating profit 25,000 ,000 Less Interest 4,000 ,000 Next, we take off any interest the firm has to pay.

What’s left is called profit before tax SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Less Expenses 15,000 ,000 Operating profit 25,000 ,000 Less Interest 4,000 ,000 Profit before tax 21,000 ,000 What’s left is called profit before tax

SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Less Expenses 15,000 ,000 Operating profit 25,000 ,000 Less Interest 4,000 ,000 Profit before tax 21,000 ,000 Taxation 8,000 ,000 Profit after tax 13,000 ,000 Then we have to pay tax to the Government. What is left is called profit after tax.

SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Less Expenses 15,000 ,000 Operating profit 25,000 ,000 Less Interest 4,000 ,000 Profit before tax 21,000 ,000 Taxation 8,000 ,000 Profit after tax 13,000 ,000 Dividend 6,000 ,000 Then the shareholders want a slice of the profit, this is called the Dividend

SALES TURNOVER 105,000,000 Less cost of goods sold 65,000,000 Gross Profit 40,000,000 Less Expenses 15,000,000 Operating profit 25,000,000 Less Interest 4,000,000 Profit before tax 21,000,000 Taxation 8,000 ,000 Profit after tax 13,000,000 Dividend 6,000,000 Retained profit 7,000,000 What is left over is kept in the business to allow it to grow. This is called retained profit.