1. Profit and Loss Accounts - Introduction
Land, labour and Capital = Service or Goods
Sold in the hope of making a profit
We use profit and loss accounts to see whether a business has had success in meeting its aim
Over a period of time – usually a year
Compiled at the end of an account period
Help shareholders and other users see how company is performing

2. Gross Profit
Gross Profit – calculated in the first part of the P&L – trading account
Gross Profit = sales – cost of sales
OS + Purchases
- CS
Quantity sold x
price of product

3. Net Profit Gross – overhead costs
Indirect cost of production bills. Transportation, payments, wages etc
Net profit = gross profit – overheads
This makes up the second part of the P&L account

4. Profitability Ratios Gross Profit Margin
Manager want to know how much profit they are making as a proportion of sales revenue
Gross Profit Margin = Gross Profit
Sales
Higher the percentage the greater portion of sales is going to profit as opposed to cos
x100

5. Profitability Ratios Net Profit Margin
Net Profit Margin = Net Profit/ sales x100
Higher percentage more profitable the business
This includes more costs
You can use the profitability ratios to compare year on year
A quick tool to judge the position of the company