What Is A Profit And Loss Account

1. What Is A Profit And Loss Account? - This is a record of the revenue and costs of a business over a period of time, usually a year

2. The Use Of Profit And Loss Accounts The Profit And Loss Account shows how much profit a business has made over the past year and what has happened to that profit It is a summary of recent business events and shows trends in what is happening to profit It is used by the Tax Office to determine how much tax a business needs to pay The profit and loss account is divided into 3 parts - the trading account - the profit and loss account - the appropriation account

3. What Is Gross Profit? The first part of the profit and loss account is the Trading Account. This is a record of the sales turnover and cost of sales Sales Turnover is the value of the sales of the business Cost Of Sales is the cost of production including raw materials and wages Gross Profit is the profit made before the overheads (fixed Costs) are deducted Gross Profit = Sales revenue – cost of sales

4. What Is Net Profit? The second part is the Profit And Loss Account This involves the calculation of Net Profit This is the profit after all costs have been deducted Two overheads which need to be deducted are distribution costs eg advertising and administration expenses Net Profit = sales revenue + non sales revenue – cost of sales – operating costs

5. What Is An Appropriation Account? This is the third part of the Profit And Loss Account and shows where the profit goes Some has to be paid as tax to the government as Corporation Tax Some is paid to shareholders as a dividend Some profit is Retained ( kept back) for future investment

6. What Is Meant By Depreciation? Depreciation is the fall in value of fixed equipment and buildings over time as they wear out There are two ways of calculating depreciation 1. Reducing Balance Method – deduct a % each year 2. Straight Line Method – deduct the same amount each year