This chapter will explain:
Why businesses need to keep accounting records such as income statements
Why profits are not the same as cash Why profits are important The differences between gross, net and
retained profit What the income statement contains
Account Vs Accountant
I am studying IGCSE Accounting.When I was in Year 10, my
accounting teachers always ask us to close all the monthly
accounts. I think I am not going to become
an accountant one day!
Accounts. This refers to the financial records of a firm’s transactions
Accountants. They are the professionally qualified people who have responsibility for keeping accurate accounts and for producing final accounts
Account Vs Accountant
Final accounts. These are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business.(example: Income statement & Balance Sheet)
Final Accounts
Profit = Sales Revenue – Cost of making products
How a Profit is made?
Ways to increase surplus by:1.Increasing sales revenue more than costs2.Reducing costs3.Increasing sales and reducing costs.
a) Reward for enterprise
Why is profit important?
The profit gained can reward the owner due to his hardwork in running the business.b) Reward For Risk TakingThe profit gained can give back as dividend to shareholders due to their contribution of capital in the business.
Why is profit important?
c) Source of finance
d) Indicator success
The profits can kept aside as the retained profit or for business expansion.
When there’s an increase of profit, this can be a good sign for the business to move on.
Understanding Income Statement
Income statement- This is the document that records the income of a business and all costs that incurred to earn that income over a period of time (AKA Profit and Loss Account)
Format of Income Statement (Trading Account)
Sales Revenue = This is the income to a business during a period of time from the sale of goods and services
Cost of goods sold= This is the cost of producing or buying in goods actually sold by the business during a time period
Gross profit= This is made when sales revenue is greater than the cost of goods sold
Format of Income Statement (Trading Account)
Sales Revenue = This is the income to a business during a period of time from the sale of goods and services
Cost of goods sold= This is the cost of producing or buying in goods actually sold by the business during a time period
Gross profit= This is made when sales revenue is greater than the cost of goods soldGross Loss?
Format of Income Statement (Trading Account)
Trading Account= This shows how the gross profit of a business is calculated
Trading Account
Sales Revenue = This is the income to a business during a period of time from the sale of goods and services
Cost of goods sold= This is the cost of producing or buying in goods actually sold by the business during a time period
Gross profit= This is made when sales revenue is greater than the cost of goods soldGross Loss?
Sell Bread RollsExample of cost of goods sold?
SausagesBreadButterBread scrumbCooking oil
Raw materials
Sell Bread RollsSelling price?
RM_2.00 @ 100 bread rolls
Sales Revenue= RM 200
Cost of goods sold?
Sausages ??Bread ??Butter ??Bread scrumb ??Cooking oil??
Cost of goods sold= RM50
Gross Profit?
RM200 – RM50= RM150
Format of Income Statement (Profit and Loss Account)
Net profit= This is the profit made by a business after all costs have been deducted from sales revenue. It is calculated by subtracting overhead costs from gross profit.
Sell Bread RollsSales Revenue= RM 200
Cost of goods sold= RM50
Gross Profit = RM150
Add: IncomeLess: ExpensesSalary ElectricityWaterRental
Net Profit = RM 20
Other terms
Depreciation = This is the fall of value of a fixed asset over time.
Retained profit = This is the net profit reinvested back into a company after deducting tax and payments to owners , such as dividend.
Question:Calculate the P&L accountPing Yung has kept records of the sales and costs involved in running his bicycle shop:Purchases of bicycle to resell: $80 000Energy costs of running business: $10 000Advertising : $2 000Wages: $10 000Sales of bicycle :$150 000Rent on premises : $10 000
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