1. Assignment 4 due in Friday!!
Wednesday Lunchtime support sessions B2.14
You have until 1.30 to work on assignment 4 then no more lesson time available.

2. LO4: Be able to interpret financial statements
Assignment 5

3. Profit and Loss Account
Assignment 5 Key terms A5
Profit and Loss Account
Balance Sheets
7 Ratios

4. Learning Outcomes Describe what a profit and loss account is
Identify the elements on a profit and loss account
Calculate the sales revenue, cost of sales, gross profit margin and net profit.
Explain why it is important for a business to create a profit and loss account.

5. P5 Interpret the contents of a trading profit and loss account and balance sheet for a selected company.

6. What is a Profit & Loss Account?
Discussion in pairs and group

7. Download class notes

8. Profit and loss accounts
A profit and loss account is a financial document created by a business at the end of the financial year.
It:
Shows whether a business has made a PROFIT or LOSS over a financial year.
Describe how the profit or loss arose – e.g. categorising costs between “cost of sales” and operating costs.

9. Profit and loss accounts
It is useful for businesses as it shows them how much profit has been made at the end of the year.
Often businesses will use projected profit and loss accounts to help them to plan their finances.
This can help with budget setting.

10. Research Task
Research a typical profit and loss account for a business.
Identify the different parts of the profit and loss account.
Tip:
Look for a smaller business.

11. Main Features of a Profit and loss account explained
Sales Revenue
The money generated from the sale of goods or services
Selling price x quantity sold
Cost of Sales
Opening stock + purchases – closing stock.
Gross Profit
Profit before expenses are deducted.
Sales revenue – Cost of Sales.
Net Profit
Net profit is the profit the business has made.
Gross Profit – Total Expenses

12. P&L purpose
Sales Revenue
SALES
164000 
Opening stock
6,000
Purchases
80000 
Closing stock 
9000 
77000 
Gross Profit
87000 
EXPENSES
Wages
7,000
Rent & Rates
4,800
Telephone
400
Professional Fees
200
Advertising
500
Transport
700
Stationery etc.
Insurance
Heating & Lighting
Bank charges
300
Depreciation
2000
Total Expenses
16,900
NET PROFIT
60100 l
The first part of the P&L account works out the gross profit by subtracting the cost of sales which is the amount the business has spent on stock during the year. Cost of sales is subtracted from the sales revenue.
Cost of Sales
To work out the net profit a business needs to subtract its expenses from its gross profit.
Net profit is always lower than gross profit. Tax may be payable on net profit.
Expenses

13. Explain why it is important for a business to construct a profit and loss account.
Limited companies need to provide detailed P&L accounts every year.
A business can compare their performance between different years.
Businesses can keep track of their costs to see if they are rising or failing.
Potential investors will want to see how much net and gross profit has been made.
If a business wants to get a loan from a bank the bank will expect to see a P&L account.

14. Chique Ltd activity sheet
Complete questions 1 - 3

15. Create a mind map of profit and loss accounts

16. Assignment 4 due in Friday!!
Homework

17. Learning Outcomes Questions
Describe what a profit and loss account is
Identify the elements on a profit and loss account
Calculate the sales revenue, cost of sales, gross profit margin and net profit.
Explain why it is important for a business to create a profit and loss account.