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Calculating Profit and Loss Calculating Profit and Loss

Businessesreceivemoneyfromsellinggoodsandservices.TheyalsohavetopaycostsinordertomakethegoodsorprovidetheservicesProfitcanbecalculatedusingthefollowingformula:

Profit = Sales Revenue Total Cost

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Defining Profit and Loss Defining Profit and Loss

Iftheirsalesrevenueisgreaterthantheircosts,thentheyhavemadeaPROFIT

Revenue>Costs=Profit

Iftheirsalesrevenueislessthantheircosts,thentheyhavemadeaLOSS

Revenue

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Why Produce a Profit and Loss Account? Why Produce a Profit and Loss Account?

Itisalegalrequirement

Itsummarisesalltheyearstransactions

Itshowsthefinancialhealthofthebusiness.

Canbeusedtocomparetradethisyearwithtradelastyear.

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How can Profit and Loss be Calculated? How can Profit and Loss be Calculated?

BusinessesusuallycalculatetheirprofitorlossattheendoftheFINANCIALYEARTocalculateprofit,abusinessneedstoknowthevalueofSALES,theCOSTOFSALESandEXPENSES

Sales This is total amount of money a business receives from selling its goods and services.

It is sometimes called turnover or total revenue

Sales This is total amount of money a business receives from selling its goods and services.

It is sometimes called turnover or total revenue

Cost of Sales This is how much it costs to make the goods or provide the services.

Eg the amount paid for raw materials

Cost of Sales This is how much it costs to make the goods or provide the services.

Eg the amount paid for raw materials

Expenses These are the overheads (fixed costs) that have to be paid

Rent and Rates

Admin Cost

Heating and Light

Advertising

Expenses These are the overheads (fixed costs) that have to be paid

Rent and Rates

Admin Cost

Heating and Light

Advertising

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The Structure of a The Structure of a Profit and Loss Account Profit and Loss Account

ProfitandLossStatementForLouPole,yearending31.08.05

Sales 400,000LESSCostofsales

OpeningStock 100Purchases 100,000

100,100LessClosingStock 100

Grossprofit 300,000

Sales, the money from selling goods

Business Name and

Date

Calculated by subtracting cost of sales from sales

Value of stock owned at the

start of the year

Value of raw materials purchased

during the year

Value of stock left at the end

of the year. This will be next years OPENING

STOCK

100,000

Need to calculate how much it has cost to make the goods that have

been sold

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Grossprofit 300,000LESSExpenses

Salaries 75,000Rent 25,000Other 14,000TotalexpensesNetprofit 186,000

Expenses listed and a total

given

Calculated by subtracting

expenses from Gross Profit

114,000

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Computers and the Computers and the Profit and Loss Account Profit and Loss Account

Spreadsheetscanbeusedtocompileprofitandlossaccounts

Businessaccountspackagesautomaticallyproduceprofitandlossaccounts

Advantagesincludespeed,accuracy,instantaccesstoinformation

Problemsoccurifwrongdataentered,wrongcommandsentered,anydataislostorcorrupted