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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

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Page 1: 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

The Profit and LossAccount

Page 2: 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

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 Account2.Profit and Loss Account3.Appropriation Account

Page 3: 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

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.

Page 4: 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

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.

Page 5: 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

Ok so what is a Trading Account?

The Trading Account is used to calculate the amount of GROSS PROFIT that a business makes.

Page 6: 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

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.

Page 7: 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

Remember that this is Sidney’s Sales Revenue and it is NOT his profit!

Page 8: 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

OPENING STOCKAt the start of the year, Sidney’s warehouse was almost empty. He only had

£1,000 worth of goods left.

Page 9: 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

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.

Page 10: 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

FULL WAREHOUSE!

Page 11: 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

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!

Page 12: 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

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 FORMULAOPENING STOCK+ PURCHASES

- CLOSING STOCK= COST OF GOODS SOLD

Page 13: 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

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.

Page 14: 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

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?

Page 15: 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

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

Page 16: 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

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

Write down the correct formula for calculating Cost of Goods Sold

Sales revenue – cost of goods sold

Opening stock + purchases – closing stock = cost of goods sold

Page 17: 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

Ok so what is the Profit and Loss Account all about?

THE PROFIT & LOSS ACCOUNT

Page 18: 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

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.

Page 19: 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

Can you think of what some of these expenses might be?

Page 20: 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

EXPENSES

Well expenses are extra costs that you have to pay for things that help you to operate as a business.

Hmm what exactly are expenses?

Page 21: 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

So you see when we add all of these extra expenses together they suddenly bring down the amount of profit that Sidney earned.

I had to pay my electric and gas bills, staff wages, rent for the warehouse and van hire.

Page 22: 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

We take away all of the expenses from his Gross Profit to work out his OPERATING PROFIT.

OPERATING PROFIT = GROSS PROFIT – TOTAL EXPENSES

Page 23: 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

Work out Sidney’s Operating Profit using these figures.

Electricity Bill = £1,500 Gas Bill = £1,450Telephone Bill = £325 Petrol for Van = £500

Gross Profit = £24,000 Rent of Warehouse = £5,500

Page 24: 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

OPERATING PROFIT = £14,725

Did you remember to show ALL of your working out!

Page 25: 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

NET PROFIT

Right so I’ve made £14,725. Can I spend all of this?

Unfortunately not Sidney.....you still owe money to the bank and the Government in the form of Taxes!

Page 26: 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

You owe the bank £2,500 in interest payments on your loan.

You always pay the Banks back first!

Page 27: 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

And you owe the Government

£3,000 in tax please!

Sole Traders & Partnerships pay Income Tax Companies pay Corporation Tax

Page 28: 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

Can you work out Sidney’s Net Profit using these figures?

Operating Profit = £14725Interest Charges = £2,500

Tax Bill = £3,000

NET PROFIT =£9,225

Page 29: 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

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

Page 30: 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

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.

Page 31: 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

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

Page 32: 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

APPROPRIATION ACCOUNTThe 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.

Page 33: 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

What does a proper Trading, Profit & Loss Account look like?