A profit and loss account is what a business uses to keep track of their finances throughout the previous twelve months.
Keeping profit and loss accounts is very important because it helps the business keep track of what they are spending. It is important that a business keeps track of their finances so that they know how much money they expect to come in to the business and if they need to prepare for a drop or rise in profits. Keeping profit and loss accounts allows the business to see what months the business does well and what months are more difficult for the business and allows them to prepare. If a business ever wants to take out a loan for a bank it is important that the bank sees profit and loss accounts before even considering giving the business money.
There are three parts to a Profit and Loss account; they consist of the Trading account, the profit and loss account, and the appropriation account.
Trading account – the formulae for the trading account consist of Gross profit = Turnover – cost of goods sold.
Profit and Loss account – Net Profit = gross profit – expenses
Appropriation account – This account shows how profits have been distributed between things such as tax, shared and dividends.
|Profit and Loss Accounts for the year ended 31st December 2001 | | |2001 |2000 | | | | | |turnover |13666 |9776 | | | | | |cost of sales |7090 |5216 | | | | | |GROSS profit |6576 |4560 | | | | | |overheads |1700 |1504 | | | | | |OPERATING profit...