FINANCIAL INFORMATION TRADING, PROFIT AND LOSS ACCOUNT SLIDE 4

WHAT IS IT AND WHY IS IT USED? A historical review of the revenue (income) and expenditure of a business for the previous financial year A statement for both internal and external reporting Details the business’s income and expenditure over the year Shows the Profit or Loss that the business has made SLIDE 4

PROFIT OR LOSS? PROFIT TURNOVER COSTS TURNOVER LOSS COSTS SLIDE 4

TRADING, PROFIT AND LOSS ACCOUNT The account can be divided into 2 distinct sections: The Trading Section The Profit Section SLIDE 4

THE TRADING SECTION This section of the Trading, Profit and Loss Account compares the value of sales to the customer with the value of the sales at cost price Main activity of any trading organisation is the purchase of goods and the selling on of these goods to the customer at a higher price Difference between the Sales Value (Turnover) and the Cost of Sales is the Gross Profit SLIDE 4

ITEMS WHICH MAY APPEAR IN THE TRADING ACCOUNT Sales (sometimes shown as Turnover) Purchases Returns Inwards (Sales Returns) Returns Outwards (Purchases Returns) Carriage Inwards (the cost of bringing stock into the shop/warehouse) Warehouse rent (part of the cost of sales as it is a charge against the storage of stock) Stock at the start of the trading period Stock at the end of the trading period SLIDE 4

FURTHER EXPLANATION! Net Sales - the total amount of money received from selling goods Cost of Goods Sold - the Cost of purchasing the goods for resale Gross Profit (Profit before expenses are deducted) Incomes – Money received from other sources such as renting out a building (Rent Received etc) Less Expenses Net Profit (Profit after expenses have been deducted) SLIDE 4

A SIMPLE TRADING ACCOUNT £ Net Sales (Turnover) 180,000 Less Cost of Sales Opening Stock 40,000 Add Purchases 95,000 Less Closing Stock 135,000 45,000 90,000 GROSS PROFIT £90,000 SLIDE 4

CALCULATIONS Net Sales or Turnover Cost of Goods Sold Gross Profit Sales – Sales Returns Cost of Goods Sold Opening Stock + Purchases – Closing Stock Gross Profit Net Sales – Cost of Goods Sold SLIDE 4

OTHER TERMINOLOGY Opening Stock – the amount of stock you started with Closing Stock – the amount of stock you are left with Purchases – the amount of stock you bought during the period Carriage In – The cost of transporting the stock into the business SLIDE 4

THE PROFIT SECTION This calculates the final profit or loss that an organisation has made over a financial time period It starts with the Gross Profit figure from the Trading Account and lists any items of additional revenue raised by the organisation as well as any expenses incurred by the organisation not directly linked to trading SLIDE 4

ITEMS WHICH MAY APPEAR IN THE PROFIT AND LOSS ACCOUNT Discounts Received Commission Received Profit on the sale of assets Expenses such as – wages carriage out rent rates bad debts depreciation any other general expenses SLIDE 4

FURTHER EXPLANATION! Incomes – Money received from other sources such as renting out a building (Rent Received etc) Less Expenses Net Profit (Profit after expenses have been deducted) SLIDE 4

A SIMPLE PROFIT AND LOSS ACCOUNT £ Gross Profit ADD Incomes 90,000 11,000 LESS Expenses 101,000 Rent and Rates Telephone 25,000 900 Wages and Salaries 45,000 70,900 Net Profit £30,100 SLIDE 4

Calculations Gross Profit Expenses Net Profit Figure Taken from Trading Section Expenses Add all expenses together Net Profit Gross Profit + Income – Total Expenses SLIDE 4

DIFFERENT ORGANISATIONS Not all businesses use the same type of Trading, Profit and Loss Account Partnerships and PLC’s will have a different variation after calculating Net Profit An Appropriation Account is added to show how the Net Profit amount is distributed between the Partners or Shareholders Profit that is not distributed is called the Unappropriated Profit SLIDE 4

REASONS FOR LOSSES Net Sales is too low compared to cost of sales Selling Price of Goods is too low The cost of goods (purchases) is too high Expenses are too high SLIDE 4

Why not try some easy exercises yourself! SLIDE 4