Profit and loss accountsProfit and loss accounts

What does it show? What does it show?

• Summarises all income and expenditure for a year

• I.e. the difference between the payments a business make and the payments it receives

• The difference is either a profit or a loss

The purpose of profit and loss The purpose of profit and loss accountsaccounts

• Give useful information to various stakeholders in the business i.e. shareholders, customers, managers etc

• Can also be used to compare a business's performance with previous years

• A legal requirement – all limited companies have to draw up a profit and loss account and all limited companies pay a tax on any profits known as corporation tax

• NB sole traders and partnerships pay income tax on profits

Profit and loss account- Firm X Year ending 25 March 2005Profit and loss account- Firm X Year ending 25 March 2005

Sales 150,000

Cost of Sales 75,000

Gross profit 75,000

Expenses

Wages/salaries 35,000

Rent 6,000

Advertising 4,000

Insurance 3,000

Electricity 6,000

Other 1,500

Total Expenses 55,500Net Profit 19,500

The components of the profit and The components of the profit and loss account loss account

• Sales – payments from customers• Cost of sales – money paid by the business

to other businesses for materials and goods• Gross profit – cost of sales taken from

actual sales (useful to compare a businesses' performance with other businesses)

• Expenses – any other outgoings other than cost of sales

The components of the profit and The components of the profit and loss accountloss account

• Expenses – any other outgoings other than cost of sales

• Net profit – amount of money left over after all costs have been paid

• A % of the net profit can be reinvested in the business and/or a % can be paid to shareholders as dividends and a % will be paid as tax to the government

Exercise Exercise

• P 369• Questions 3 & 4• Questions 1 & 2• Integrated activity p 370