3.3.2 Profit (what it is and why it matters)
3.3.3 Purpose and main elements of profit/loss account
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Profit can be explained by a simply formula
Profit (net) = income – expenses
Businesses calculate the total profit at the end of the year by using profit and loss accounts.
They provide a financial summary of the trading activity the business has taken for a year.
Trading Account shows the gross profit and loss (usually combined with profit and loss)
Profit & Loss Account shows the net profit (true profit) and loss
What shows in a Limited company
- corporation tax paid on company profits will be shown
- Appropriation account (final section) shows what the company has done with the profits made
- results form the previous year are included
Turnover: amount of revenue earned by firm at marked up price
Cost of Sales Total: (opening stock + purchases) – Closing Stock
Opening Stock: value of stock remaining from the previous year
Purchases: amount of money spent on new stock this year
Closing Stock: value of stock left unsold to be carried forward
Gross Profit = cost of sales total – turnover
Net Profit = gross profit - expenses
Depreciation: estimation of the loss in major assets such as furniture and machinery
Bad Dept: amount of money written off through goods already sold on credit which will never be paid for.
Make sure you know how to calculate the cost of sales total(also known as cost of goods sold)
because you won't be able to solve a question regarding profit and loss!
