Profit & Loss Account ACCOUNTING & FINANCE

Introduction and Key Definitions A statement recording all a firm ’ s revenues and costs within a past trading period. Profit=Revenue – Costs.

Role and Purpose Using the P & L Account: Directors / managers can: review past performance, use as a basis to make future decisions. Shareholders can: calculate return on investment-was putting money into the business a good idea?.

Role and Purpose Using the P & L Account: Lenders can: assess the ability of the business to repay monies borrowed, by seeing if profits big enough to repay loan.

Calculation of profit - also a legal requirement: Companies must send copy of P & L to State. All firms must provide Government with profit figures for tax purposes. Role and Purpose

Limitations Can provide unrealistic picture : Inflation distorts prices. So profits higher now than 20years ago Doesn ’ t tell you the trading conditions in which a business operates. (so a company with small profits post Tsunami probably doing well even though profits may have fallen

Explanation of Profit & Loss Key Terms Refer to the Profit & Loss example at the end of this section. Usually divided into three distinct sections ……….

Explanation of Profit & Loss Key Terms The Trading Account Sales Revenue / Turnover number of items sold X selling price per item. Cost of Sales / Cost of Goods Sold costs directly involved in producing product eg materials, direct labour. GROSS PROFIT Sales revenue – cost of sales.

Explanation of Profit & Loss Key Terms The Profit & Loss Account Other Expenses indirect / fixed costs / overheads, ie costs not directly involved with producing the product. Other expenses – Gross Profit = Operating Profit.

Explanation of Profit & Loss Key Terms The Profit & Loss Account OPERATING PROFIT (or Trading Profit). Gross Profit minus ‘ other ’ expenses.. Measure most commonly used for assessing performance of business.

Explanation of Profit & Loss Key Terms Non-operating income revenue earned through other activities / interests, eg rent from property, interest from cash in bank, dividends from shares in other companies. Added to Operating Profit. The Profit & Loss Account

Explanation of Profit & Loss Key Terms Interest on any loans - deducted from Operating Profit. NET PROFIT Profit after cost of sales, other expenses and interest deducted from sales revenue, but before tax. The Profit & Loss Account

Explanation of Profit & Loss Key Terms The Appropriation Account This section shows how the profit has been distributed. Corporation Tax tax on profit of companies. Profit after tax (or profit for the financial year, profit attributable to the company).

Explanation of Profit & Loss Key Terms Dividends percentage of the profit after tax paid to shareholders. NB Do not legally have to be paid. RETAINED PROFIT profit after cost of sales, other expenses, interest, tax and dividends have been deducted from revenues. The Appropriation Account

Explanation of Profit & Loss Key Terms Retained Profits are transferred to retained profit reserve in Balance Sheet. The Appropriation Account

Explanation of Profit & Loss Key Terms Sole Trader Accounts P & L Account: Only includes ‘ Net Profit ’ figure. This is Sole Trader ’ s income / earnings and they pay tax on this. No ‘ Appropriation Section ’.

Example Profit & Loss Account Profit and Loss Account for B. Davies for the year ending 31/12/02

Example Profit & Loss Account Profit and Loss Account for B. Davies for the year ending 31/12/02 Note that this is a Profit & Loss Account of a sole trader and, therefore, does not include an Appropriation Section.