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What is Profit & Loss all about?

The profit and loss account is actually 3 different things all rolled into one! The names of these 3 sections are:

1. 2. 3.

Trading Account Profit and Loss Account Appropriation Account

Remember these and ou are doing !ell"

To keep things simple, the Profit & Loss Account looks at all of the things that you have bought and sold across a year and takes a ay all of the costs you had to pay during that year!

"f you make more money than you have to pay out you are in profit and if you pay out more than you make then you are in loss!

(k so hat is a Trading Account) T#$ TRA%&'( A))*+'T

The Trading Account is used to calculate the amount of (R*,, PR*-&T that a business makes! #rm!!!!!ok let$s sho you hat this actually means using %idney the &odgy %alesman to help us out!

%idney has en'oyed a good year but e no need to ork out ho much these items cost him to buy to help us calculate his profit!

" have made *3+,,,, in sales during this year!

-emember that this is %idney$s %ales -evenue and it is '*T his profit!

*P$'&'( ,T*). At the start of the year, %idney$s arehouse as almost empty! .e only had */,,,, orth of goods left!

1limey " need to buy more stock and P+R)#A,$, 2uickly!


%idney bought */0,,,, orth of ne goods during the year hich he intended to sell to the general public! -+LL WAR$#*+,$"

)L*,&'( ,T*).

At the end of the year " have got only *0,,,, orth of stock left in my arehouse!
3losing stock is the value of the stock left in the business at the end of the year! "t is the amount of stock that is +',*L%! )*,T *- (**%, ,*L% The 3ost of 4oods %old figure helps us to ork out ho much money %idney has made from the buying and selling of stock during the year!

&/P*RTA'T -*R/+LA
(P#5"54 %T(36

0 1 2

P7-3.A%#% 3L(%"54 %T(36 3(%T (8 4((&% %(L&

(R*,, PR*-&T

&o you think that " made a profit this year)


9ell e can help %idney to find out by ta3ing a!a the )ost of (oods ,old from ,ales Re4enue! This tells us ho much 4ross Profit :or loss; as made!

5ob the 5lob6s 7uestion Time


3an you ork out %idney$s 3ost of 4oods %old)

9hat

as %idney$s 4ross Profit figure for this year)

9ell did you get the right ans ers)


<ou should have got the follo ing ans ers: )*,T *- (**%, ,*L% (pening %tock = */,,,, 0 Purchases = */0,,,, 3losing %tock =*0,,,, = *//,,,, 3ost of 4oods %old = 8119::: (R*,, PR*-&T %idney had %ales -evenue of *3+,,,,! 9e take a ay the 3ost of 4oods %old =*//,,,, This means *3+,,,, > *//,,,, = *0?,,,, 4ross Profit = 82;9:::

4ross Profit sho s us the level of profit earned on the buying and selling of goods!

5ob the 5lob6s 7uestion Time


Ans!er these <uestions.

#@plain TW* ays in increased his levels of 4ross Profit)

hich %idney could have

=#int. Thin3 about changing his suppliers and ma be changing the prices he charges his customers">

9rite do n the correct formula for calculating 4ross Profit

9rite do n the correct formula for calculating 3ost of 4oods %old

(k so hat is the Profit and Loss Account all about) T#$ PR*-&T & L*,, A))*+'T

Ahh actually sorry %idney but you do not have *0?,,,, to spend!

3ool "$m rich "$ve got *0?,,,, of profit to spend!

This figure is only your (R*,, PR*-&T figure!!!! e still need to take a ay all of %idney$s e@penses!
)an ou thin3 of !hat some of these e?penses might be?

.mm hat e@actly are e@penses) $@P$',$,


9ell e@penses are e@tra costs that you have to pay for things that help you to operate as a business!

%o you see hen e add all of these e@tra e@penses together they suddenly bring do n the amount of profit that %idney earned!

" had to pay my electric and gas bills, staff ages, rent for the arehouse and van hire!

9e take a ay all of the e@penses from his 4ross Profit to ork out his *P$RAT&'( PR*-&T! *P$RAT&'( PR*-&T 2 (R*,, PR*-&T A T*TAL $@P$',$,

9ork out %idney$s (perating Profit using these figures!

#lectricity 1ill = */,+,, Telephone 1ill = *30+ 4ross Profit = *0?,,,, *+,+,,

4as 1ill = */,?+, Petrol for Aan = *+,, -ent of 9arehouse =

*P$RAT&'( PR*-&T 2 8

&id you remember to sho ALL of your orking out!

-ight so "$ve made */?,B0+! 3an " spend all of this) '$T PR*-&T
7nfortunately not %idney!!!!!you still o e money to the bank and the 4overnment in the form of Ta@es!

<ou o e the bank *0,+,, in interest payments on your loan!


<ou al ays pay the 1anks back first!

And you o e the 4overnment *3,,,, in ta@ please!

%ole Traders & Partnerships pay &ncome Ta? 3ompanies pay )orporation Ta?

3an you ork out %idney$s 5et Profit using these figures)
(perating Profit = */,+,, "nterest 3harges = *30+ Ta@ 1ill = */,?+,

'$T PR*-&T 2 8 9hat is the name of the ta@ that %ole Traders and Partnerships must pay upon their profits)

9hat is taken a ay from (perating Profit first: "nterest or Ta@es)

(k "$ve made *C,00+ 5et Profit can " spend this no )


B$,"""" (nce you have taken a ay interest and ta@ payments, hat is left as 5et Profit is entirely your o n money to spend as you ant to!

APPR*PR&AT&*' A))*+'T
The Appropriate Account is the final section that e need to learn! This sho s us hat %idney decided to do ith his *C,00+ of 5et Profit!

9hen a business saves some money this is called R$TA&'$% PR*-&T! This can be used for future investment and means that they ill need to borro L#%% from a bank! "f %idney as a company he might have to pay %&C&%$'%,!

"$m going to save *0,,,,, and take out *B,00+ as my ages :called %RAW&'(,;!

9hat does a proper Trading, Profit & Loss Account look like)
8
,AL$, R$C$'+$ (pening %tock Purchases 3losing %tock 3(%T (8 4((&% %(L& (R*,, PR*-&T $@P$',$, #lectricity & 4as Aehicles :Petrol; Telephone -ent *P$RAT&'( PR*-&T L#%% "nterest 5#T P-(8"T 1? TAD L#%% Ta@ '$T PR*-&T A-T$R TA@ -#TA"5#& P-(8"T &"A"&#5&% &-A9"54% 0,,,, > B,00+ 3,,,, F922E 0,+,, /0,00+ 0!C+, +,, 30+ +,+,, 1;9D2E /,,,, /0,,,, 0,,,, //,,,, 2;9:::

8
3+,,,,

TRADING ACCOUNT

PROFIT & LOSS ACCOUNT

APPROPRIATION ACCOUNT

5ob the 5lob6s 7uestion Time


9ork out the values of the blanks in the Trading, Profit and Loss Account! 8
,AL$, R$C$'+$ (pening %tock Purchases 3losing %tock 3(%T (8 4((&% %(L& (R*,, PR*-&T $@P$',$, #lectricity & 4as Aehicles :Petrol; Telephone -ent *P$RAT&'( PR*-&T L#%% "nterest 5#T P-(8"T 1? TAD L#%% Ta@ '$T PR*-&T A-T$R TA@ -#TA"5#& P-(8"T &"A"&#5&% &-A9"54% /0,,,, /,,,,, B,00+ 30,,,, /E,+,, +C,E,, 0+,B+, /,+,, /,E+, 0,,,,, /,,,,, ?0,+,, +,,,,

A3+,,,,

5
12E9:::

) 1;9D2E

%F922E

5ob the 5lob6s 7uestion Time


)op out the paragraph belo! and use the !ords in the bo? to fill in the gaps. R$TA&'$% PR*-&T %RAW&'(, APPR*PR&AT&*' *P$RAT&'( (R*,, PR*-&T $L$)TR&)&TB TRA%&'( TA@ P+R)#A,$, PR*-&T & L*,, %&C&%$'%,

A Trading9 Profit and Loss Account is used to sho! the profit or loss made b a business. The full account contains three sections. The first section is called the GGGGGGGGGGGGGGGG Account. This sho!s the profit or loss earned b the bu ing and selling of goods o4er the ear. This account is used to calculate the GGGGGGGGGGGGGGG Profit and it does this b ta3ing a!a the )ost of (oods ,old from ,ales Re4enue. The )ost of (oods ,old is calculated b adding GGGGGGGGGGGGGGGGGG to the *pening ,toc3 le4els and then ta3ing a!a the )losing ,toc3 4alue. The second section of the account is called the GGGGGGGGGGGGGG & GGGGGGGGGG Account. This is used to calculate GGGGGGGGGGGGGGGG Profit !hich is !hen ou ta3e a!a e?penses from (ross Profit. An e?ample of an e?pense is GGGGGGGGGGGGGGGGGGGG. *nce ou 3no! the *perating Profit ou then ha4e to ta3e a!a &nterest and then GGGGGGGGGGG. This then gi4es ou the 'et Profit earned b the business. The final section of the account is called the GGGGGGGGGGGGGGGGGGGGG Account. This is used to sho! !hat the o!ners of the business actuall do !ith their profits. There are t!o common things that 'et Profits are used for. These are for

pa ing the shareholders GGGGGGGGGGGGGGGGGGGGG and the other one is !hen the o!ners ta3e a cut of the mone for themsel4es as GGGGGGGGGGGGGGGGGGGGGG.