1. The profit
&
Loss Account
Made easy

2. 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.

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

4. 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…

5. 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

6. 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.

7. 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.

8. 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.

9. 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

10. 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.

11. 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

12. 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.

13. 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

14. 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.