Profit and Loss Accounts

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A01 Profit and loss account:
A profit and loss account calculates the amount of gross and net profit that a business takes on an annual basis; it also outlines the loss which has occurred through the business, through necessary overheads. There are many aspects included within a profit and loss account, all of which I am going to briefly explain. It is important to have a profit and loss account within a business to enforce correct usage of the money. The company will be able to see where the business is losing money, they will then know to tighten up, trends can be highlighted and future plans can be made. It also outlines any parts of the business whereby, more money is being unnecessarily lost. The main focus of this account measure the expenditure and revenue of the business, which when calculated outline either a profit or a loss for the company for that financial year. Large companies, private limited companies and public limited companies must submit their profit and loss account as part of government legislation; this requires the business to submit their accounts annually to Companies House and Inland Revenue to calculate corporation tax. The business would provide a profit and loss account when wanting to apply for the following: a loan from the bank, the Inland Revenue for calculating tax return for the business and strategic planning within the business. Sales revenue/turnover:

This is the total amount of money that is taken from sales or services made within the business. For example, in regards Tesco it would be the amount of all their products that they sell in the store totalled up each year. This is extremely important in regards to a business as, the higher the sales turnover, the higher the costs in terms of buying in the stock, current assets, and the more money that is made for the business. This can vary considerably due to economic, social changes. The sales revenue outlines the total value of goods or services sold, however, it does not connect with the amount of money a business has received in payment as not all of the products or services may have been brought through credit. In terms of Tesco, in 2008 their overall sales turnover was £51.8 billion, and in 2011 it totalled at a staggering £67.6 billion, this shows an extremely high sales turnover. In this graph there is a trend, it shows how each financial year the sales are increasing, this could be because Tesco is expanding abroad, promotional offers are attracting consumers and the range of goods and services are improving.

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Cost of sales:
It is the costs that are involved in purchasing the product or in the costs involved within production of the product. When showing sales, it is important to include the opening and closing balance that appears within the balance sheet, as they are so closely connected. When Tesco buy an item to sell on like a bottle of wine, they are known as purchases. At the end of the financial year business will have unsold purchases, which are known as closing stock. These can be identified by completing a stock check. Certain stock may be damaged, therefore have a reduced value. The stock records are then adjusted so that the financial values stated are corrected so that they are accurate. The higher the cost of the sale, the lower the overall gross profit for the business, in relation to the sales turnover. Although in order to make a higher gross profit, it is important not to reduce the cost of sales to such degrees as it t affect the quality of the products produced and ultimately the sale turnover. The cost of sales for Tesco for 2011 totalled at £55871 million, this has increased since 2010 which totalled at £52303 million (2). This shows that Tesco is an expanding supermarket, throughout each year, more and more turnover is being made enabling Tesco to buy in products to be sold.

Expenditure:
Expenditures are other costs that the business has to take into account such as wages,...
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