Transcript The Profit and Loss Account

The Profit and Loss
Account
What is Profit & Loss all about?
The profit and loss account is actually 3 different things
all rolled into one! The names of these 3 sections are:
1.Trading Account
2.Profit and Loss Account
3.Appropriation Account
To keep things simple, the Profit & Loss
Account looks at all of the things that you
have bought and sold across a year and
takes away all of the costs you had to pay
during that year.
If you make more money than you have
to pay out you are in profit
if you pay out more than you make then
you are in loss.
Ok so what is a Trading
Account?
The Trading Account is used to
calculate the amount of GROSS
PROFIT that a business makes.
let’s show you what this actually
means using Sidney the Dodgy
Salesman to help us out.
I have made £35,000 in
sales during this year.
Sidney has enjoyed a
good year but we now
need to work out how
much these items cost him
to buy to help us calculate
his profit.
Remember that
this is Sidney’s
Sales Revenue
and it is NOT his
profit!
OPENING STOCK
At the start of the
year, Sidney’s
warehouse was
almost empty. He
only had £1,000
worth of goods left.
Blimey I need to buy
more stock and quickly!
Sidney bought £12,000
worth of new goods during
the year which he intended
to sell to the general public.
FULL WAREHOUSE!
CLOSING STOCK
At the end of the year I have
got only £2,000 worth of
stock left in my warehouse.
Closing stock is the value of
the stock left in the business
at the end of the year. It is the
amount of stock that is
UNSOLD!
COST OF GOODS SOLD
The Cost of Goods Sold figure helps us to work
out how much money Sidney has made from the
buying and selling of stock during the year.
IMPORTANT FORMULA
OPENING STOCK
+ PURCHASES
- CLOSING STOCK
= COST OF GOODS SOLD
Do you think that I made a
profit this year?
Well we can help Sidney
to find out by taking
away the Cost of Goods
Sold from Sales
Revenue. This tells us
how much Gross Profit
(or loss) was made.
Bob the Blob’s Question Time
Can you work out Sidney’s Cost of Goods Sold?
What was Sidney’s Gross Profit figure for this year?
Well did you get the
right answers?
You should have got the following answers:
COST OF GOODS SOLD
Opening Stock = £1,000 + Purchases = £12,000 Closing Stock =£2,000 = £11,000
Cost of Goods Sold = £11,000
GROSS PROFIT
Sidney had Sales Revenue of £35,000.
We take away the Cost of Goods Sold =£11,000
This means £35,000 - £11,000 = £24,000
Gross Profit = £24,000
Bob the Blob’s Question Time
Explain TWO ways in which Sidney
could have increased his levels of
Gross Profit?
(Hint. Think about changing his
suppliers and maybe changing
the prices he charges his
customers!)
Write down the correct formula for calculating Gross Profit
Sales revenue – cost of goods sold
Write down the correct formula for calculating Cost of Goods Sold
Opening stock + purchases – closing stock = cost of goods sold
Ok so what is the Profit and
Loss Account all about?
THE PROFIT & LOSS ACCOUNT
Cool I’m rich I’ve got
£24,000 of profit to spend!
Ahh actually sorry
Sidney but you do not
have £24,000 to spend.
This figure is only your
GROSS PROFIT
figure....we still need to
take away all of Sidney’s
expenses.
Can you think of what some of these expenses might be?
Hmm what exactly are
expenses?
EXPENSES
Well expenses are extra costs that
you have to pay for things that help
you to operate as a business.
I had to pay my electric and
gas bills, staff wages, rent for
the warehouse and van hire.
So you see when we add
all of these extra
expenses together they
suddenly bring down the
amount of profit that
Sidney earned.
We take away all of the
expenses from his Gross
Profit to work out his
OPERATING PROFIT.
OPERATING PROFIT = GROSS
PROFIT – TOTAL EXPENSES
Work out Sidney’s
Operating Profit using these
figures.
Electricity Bill = £1,500
Telephone Bill = £325
Gross Profit = £24,000
Gas Bill = £1,450
Petrol for Van = £500
Rent of Warehouse = £5,500
OPERATING PROFIT = £14,725
Did you remember to show
ALL of your working out!
Right so I’ve made £14,725.
Can I spend all of this?
NET PROFIT
Unfortunately not Sidney.....you
still owe money to the bank and
the Government in the form of
Taxes!
You owe the bank £2,500 in
interest payments on your loan.
You always pay the Banks back first!
And you owe the
Government
£3,000 in tax
please!
Sole Traders & Partnerships pay Income Tax
Companies pay Corporation Tax
Can you work out Sidney’s
Net Profit using these figures?
Operating Profit = £14725
Interest Charges = £2,500
Tax Bill = £3,000
NET PROFIT =£9,225
What is the name of the tax
that Sole Traders and
Partnerships must pay upon
their profits?
Answer: Income tax
What is taken away from Operating Profit first:
Interest or Taxes?
Answer: interest
Ok I’ve made £9,225 Net
Profit can I spend this now?
YES!!!! Once you
have taken away
interest and tax
payments, what is left
as Net Profit is entirely
your own money to
spend as you want to.
I’m going to save £2,000, and
take out £7,225 as my wages
(called DRAWINGS).
When a business saves some
money this is called RETAINED
PROFIT. This can be used for
future investment and means that
they will need to borrow LESS
from a bank! If Sidney was a
company he might have to pay
DIVIDENDS
APPROPRIATION ACCOUNT
The Appropriation
Account is the final
section that we need to
learn. This shows us
what Sidney decided to
do with his £9,225 of Net
Profit.
What does a proper
Trading, Profit & Loss
Account look like?