3. 23 Calculating the profit or loss of a business

3.23 Calculating the profit or loss of a business Types of financial analysis  Many types of financial reports are concerned with planning ahead.  These include cashflow forecasting, break-even analysis and budget setting.  Others are concerned with reporting results at the end of the year.  These include the profit and loss account and the balance sheet.

3.23 Calculating the profit or loss of a business The purpose of a profit and loss account  It summarises all the sales revenue for the financial year.  It summarises all the payments or expenses for the same year.  The difference between the two totals is the profit or loss made in that year.

3.23 Calculating the profit or loss of a business Why produce a profit and loss account?  It is a legal requirement. Tax is paid on the profit.  It summarises all the year’s transactions – as recorded in documents such as invoices.  It shows the financial ‘health’ of the business.  It is studied by managers, shareholders, banks, financiers and other relevant groups of people.

3.23 Calculating the profit or loss of a business The structure of a profit and loss account 1 Top part is concerned with gross profit, e.g. £ Sales300,000 Cost of sales100,000 Gross profit200,000 Note: cost of sales is the same as ‘cost of purchases’. It is deducted from sales.

3.23 Calculating the profit or loss of a business The structure of a profit and loss accounts 2 Second part is concerned with net profit, i.e. gross profit minus expenses. £ Gross profit200,000 Expenses Salaries55,000 Rent10,000 Other5,000 Total expenses70,000 Net profit130,000

3.23 Calculating the profit or loss of a business Your turn! Sales Cost of sales Gross profit Expenses Salaries Rent Electricity Other Total expenses Net profit £ 68,000 12,000 5,000 £ 320, ,000 ?? 480,000 90, ,000

3.23 Calculating the profit or loss of a business Computers and the profit and loss account  Spreadsheets can be used to compile profit and loss accounts  Business accounts packages automatically produce profit and loss accounts  Advantages include speed, accuracy, instant access to information  Problems occur if wrong data entered, wrong commands entered, any data is lost or corrupted.