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The Trading, Profit and Loss Account

Higher/Int 2

Business Management

2009-2010

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Communication

• One of the Roles of Finance is communication of information with the use of an accounting system.

• So that information can be communicated in a recognisable form, items of a similar nature are gathered together and reported in standard Financial Statements.

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The Accounting System

• There are a number of stages involved in an accounting system:– Preparing and recording accounting

documents.– Transferring the information from the

documents to records in books or on a computer.

– Preparing the financial statements.

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Why Must We Account?

• Accounts must be kept to:– Ensure a secure record of all transactions in

order to prevent fraud.– Produce accounts for tax purposes.– Monitor business performance, so that

managers and owners can see how well the company is doing.

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The Two Main Financial Statements

• The two main financial statements are:– The Balance Sheet.– The Trading Profit and Loss Account.

• These statements provide information relating to a particular aspect of the organisation’s activities during a trading period - usually one financial year.

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The Trading Profit and Loss Account

• The Trading Profit and Loss Account can be split into two sections:– The Trading Account.

– The Profit and Loss Account.

• The Trading Profit and Loss Account is a historical review of the sales revenue and expenditure of a business for the previous financial year.

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The Trading Account

• The Trading Account shows the profit, before charging any expenses or overheads like heat, light, wages or telephone bills.

• This allows the owner to see how healthy the profit is before these expenses are included.

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Gross Profit

• The Trading Account shows the gross profit (or loss) for the reporting period.

• The gross profit equals the sales revenue minus the cost of goods sold.

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The Trading Account: Items

• Sales

• Purchases

• Returns Inwards (Sales Returns)

• Returns Outwards (Purchase Returns)

• Carriage Inwards

• Opening Stock

• Closing Stock

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The Profit and Loss Account

• The Profit and Loss Account is completed after the Trading Account. It shows the net profit after all expenses and overheads have been charged.

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The Profit and Loss Account

• The Profit and Loss Account starts with the gross profit figure from the Trading Account.

• It then lists any items of additional revenue raised by the business, as well as any expenses incurred by the business not directly linked to trading.

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Net Profit

• The Profit and Loss Account shows the net profit (or loss) for the reporting period.

• The net profit equals the gross profit minus all expenses and overheads.

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The Profit and Loss Account: Items

• Discounts Received• Commission Received• Profit on the Disposal of Assets• Expenses such as:

– Wages– Carriage Outwards (Dispatch of Goods)– Rent– Rates– Insurance– Advertising– Bad Debts Allowance– Depreciation– Stationery

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Appropriation of Profits

• The Profit and Loss Account shows how profitable a business has been over a period of time.

• Partnerships and limited companies produce an extra section in their Profit and Loss Account called the Appropriation Account. This shows how profits or losses are to be shared between different parties.

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Interpretation

• The Trading Profit and Loss Account can help us to answer the following questions:– Was this year’s trading result good or bad compared

with last year or with a rival company?

– Has the gross profit figure improved this year compared with last year?

– Are we making efficient use of our stock?

– Does our net profit figure compare favourably with those of other businesses in the same industry?

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Task

• Read pages 10-15 from your core notes.

• Using the knowledge gained from this presentation and the relevant pages in the core notes, answer Activity 3 on the Trading Profit and Loss Account.