17/9/2020 ENTERPRISE: ALLURE SCHOOLS: SIR TALENT

TOPIC: FINANCE
DETERMINING PROFITABILITY OF THE BUSINESS
 To ascertain the progress, one of the important things
to be done is to find out whether the business is
making profits or losses
 Profit or loss made by a business is calculated by
preparing what is called a trading and profit or loss
account
 The trading and profit or loss account is divided into
two parts:
i. Trading account
ii. Profit or loss account
 These two parts are however, shown in a continuous
form as one
 The 1st part calculates gross profit and the 2nd part
calculates net profit or loss
ITEMS INCLUDED IN THE TRADING AND PROFIT OR LOSS
ACCOUNT

Sales – the goods and/or services that the business sell to its
customers
Cost of goods sold – represents the amount spent on acquiring
the goods that are then sold as sales. It is made up of purchases
and stock
Operating Expenses – these are the cost incurred by the
business for its day-to-day operations
 Sales – Cost of Goods Sold = Gross Profit
 Cost of Goods Sold = Opening stock + Purchases –
Closing stock
 Gross Profit – operating Expenses = Net profit or Loss
 When gross profit is more than operating expenses,
the difference will be a net profit
 When gross profit is less than operating costs, the
difference will be a net loss
TRADING AND PROFIT/LOSS ACCOUNT

Sales 000000
Less Cost of Goods Sold
Opening stock 000000

Add Purchases 000000

000000
Less closing stock (00000)

000000
Gross profit 00000
Less operating expenses
A 00000
B 00000

(00000)
Net profit/loss 00000
 EXERCISE

Use the following information to prepare a trading and profit or

loss account
Sales 55000
Purchases 25500
Opening stock 6600
Closing stock 8000
Expenses
Rent 3450
Electricity 1500
Salaries 12000
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