1. FINANCIAL INFORMATION
TRADING, PROFIT AND LOSS ACCOUNT
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2. 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
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3. PROFIT OR LOSS?
PROFIT
TURNOVER
COSTS
TURNOVER
LOSS
COSTS
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4. TRADING, PROFIT AND LOSS ACCOUNT
The account can be divided into 2 distinct sections:
The Trading Section
The Profit Section
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5. 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
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6. 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
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7. 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)
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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)
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14. 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
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15. Calculations Gross Profit Expenses Net Profit
Figure Taken from Trading Section
Expenses
Add all expenses together
Net Profit
Gross Profit + Income – Total Expenses
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16. 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
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17. 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
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18. Why not try some easy exercises yourself!
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