Trading Profit and Loss Accounts KEY TERMS Distributed

Trading, Profit and Loss Accounts

KEY TERMS • • • Distributed Profit: profit that is returned to the owners of a business. Dividend: money paid to shareholders when profits is distributed. Gross Profit: sales revenue less cost of sales. Net Profit: gross profit less expenses. Profit: the money left over after all costs have been subtracted from revenue. Profit & Loss Account/Income Statement: a financial document showing a firms income and expenditure in a particular time period. Profit & Loss Account: shows how net profit is calculated by subtracting expenses from gross profit. Profit & Loss Appropriation Account: shows how the profit after tax is distributed between owners and the business. Retained Profit: profit that is kept by the business and may be used in the future. Trading Account: shows how gross profit is calculated by subtracting costs of sales from turnover.

FORMULAE 1. Gross Profit = Turnover – Costs of sales 2. Net Profit = Gross Profit – Expenses 3. Trading Account = Sales Turnover – Cost of Sales i. e. Gross Profit 4. Profit & Loss Account = Gross Profit – Expenses = Operating Profit – Non operating income – interest = Net Profit 5. Appropriation Account = Net Profit – Taxation = Profit after Taxation – Dividends = Retained Profit

Profit v Cash http: //www. tutor 2 u. net/business/presentations /finance/profitandcash/player. html

Profit v Cash • Some goods are sold on credit – so still owe money. Profit is greater than cash. • Sometimes owners put more cash into the business – increases cash balance, no effect on profit. • Purchase of fixed assets will reduce cash balances, no effect on profits. • Amount of cash at the end will be different from profit because at the beginning of the year cash balance will likely be zero.

Profit & Loss Accounts The calculation of profit and loss is one of the most important objectives of accounting and shows how well a business has traded over a particular period of time. Many stakeholders will be interested in this. It shows how much the firm has earned from selling its product or service, and how much it has paid out in costs. The difference between these two is the amount of profit that has been earned. A profit & loss account shows the detail.

Investors Workers Inland Revenue – the tax man! Users of Financial Info. Lenders of money e. g. banks Competitors – all limited companies must publish their accounts

There are 2 parts that we need to focus on: • The Trading Account – This calculates the Gross Profit • The Profit and Loss account – This Calculates the amount of Net Profit

Mr Reading's Burger Bar – Trading Account 2007 £OOO Sales (Turnover) 300 How much stock was left over from last year Cost of Sales Opening Stock Purchases Less Closing Stock Gross Profit 40 120 160 30 170 How much stock was left over from this year (unsold stock)

Mr Reading's Burger Bar plc – profit and loss account Gross Profit Less expenses Wages Insurance Rates Rent Telephone Advertising Depreciation IT Light and heat Net Profit 170 On some profit and loss accounts this is not listed 50 2 11 30 11 4 5 3 2 118 52

Sales (Turnover) Cost of Sales Mr Reading's Burger Bar plc £OOO Opening Stock Purchases Less Closing Stock 40 120 160 30 Gross Profit Less expenses Wages Insurance Rates Rent Telephone Advertising Depreciation IT Light and heat Net Profit 300 50 2 11 30 11 4 5 3 2 Trading Account 130 170 Profit and Loss Account 118 52

Key point: • This document is prepared once a year • Usually it compares the current years figures with last years results • Look at the next slide…. .

Mr Reading's Burger Bar 2007 £OOO Sales (Turnover) 2008 £OOO 300 350 Cost of Sales Opening Stock Purchases Less Closing Stock Gross Profit Less expenses Wages Insurance Rates Rent Telephone Advertising Depreciation IT Light and heat Net Profit Last years closing stock becomes the new year’s opening stock 75 40 120 160 30 145 175 30 35 130 170 140 210 mbnj 50 2 11 30 11 4 5 3 55 3 12 35 11 5 2 4 2 8 118 52 55 135 75

There is one final thing you need to know, although it is unlikely to come up in the exam – The Appropriation Account

The Appropriation Account – shows what happens to the net profit. Sole Traders and Partnerships do not have to do an appropriation account. . Net Profit 52 75 Corporation Tax 12 17 Profit After Tax 40 58 Divends paid 15 20 Retained profit carried forward 25 28 Tax paid on profits Total value of dividends paid to share holders Money kept by the business for its own uses

Mr Reading's Burger Bar £OOO Sales (Turnover) Cost of Sales 2007 2008 £OOO 300 Opening Stock Purchases Less Closing Stock 40 120 160 30 145 175 30 35 Gross Profit Less expenses Wages Insurance Rates Rent Telephone Advertising Depreciation IT Light and heat Net Profit Corporation Tax Profit After Tax Divends paid Retained profit carried forward 75 350 50 2 11 30 11 4 5 3 2 130 170 118 52 12 40 15 25 Trading Account mbnj 55 3 12 35 11 5 2 4 8 140 210 55 Profit and Loss Account 135 75 17 58 20 28 Appropriation account