Profit and Loss
Profit and loss accounts, balance sheets
Profit and loss accounts, balance sheets
Two of the most important financial statements for a business are the Profit and Loss Account, and the Balance Sheet.
The Profit and Loss Account shows the profit or loss of a business over a given period of time e.g. 3 months, 1 year, etc.
In contrast, the Balance Sheet is like a photograph taken at an instant in time giving a picture of what the business owns and what the business owes at that moment in time. As we shall see it will always balance because what the business owns is financed by what the business owes.
The Profit and Loss (P&L account)
One of the most important objectives of a business is to make a profit. The P&L account shows the extent to which it has been successful in achieving this objective.
Companies are expected to keep their P&L accounts in certain formats.
Typically the P&L account will show the revenues received by a business and the costs involved in generating that revenue. In simple terms:
Revenues - Costs = Profits.
A typical P&L account will look like the following:
Case Study:
P&L Account for Superior Traders as at 31/12/2004
You can find out the gross profit of a business by deducting cost of sales from turnover:
£100,000 - £50,000 = £50,000
You can find out the operating profit by deducting the expenses from the gross profit:
£50,000 - £30,000 = £20,000
You may also come across the term net profit. Operating profit is earned from carrying out a businesses normal operations e.g. producing confectionery, or selling Christmas cards. Net profit takes account of other sources of income and expenditure that are not involved in normal operations e.g. interest paid on loans and interest received on having a positive balance in a bank account.
Turnover - is the value of sales made in a trading period. It is some referred to as sale revenue and is calculated by the average price of items sold x the number
Profit and loss accounts, balance sheets
Two of the most important financial statements for a business are the Profit and Loss Account, and the Balance Sheet.
The Profit and Loss Account shows the profit or loss of a business over a given period of time e.g. 3 months, 1 year, etc.
In contrast, the Balance Sheet is like a photograph taken at an instant in time giving a picture of what the business owns and what the business owes at that moment in time. As we shall see it will always balance because what the business owns is financed by what the business owes.
The Profit and Loss (P&L account)
One of the most important objectives of a business is to make a profit. The P&L account shows the extent to which it has been successful in achieving this objective.
Companies are expected to keep their P&L accounts in certain formats.
Typically the P&L account will show the revenues received by a business and the costs involved in generating that revenue. In simple terms:
Revenues - Costs = Profits.
A typical P&L account will look like the following:
Case Study:
P&L Account for Superior Traders as at 31/12/2004
You can find out the gross profit of a business by deducting cost of sales from turnover:
£100,000 - £50,000 = £50,000
You can find out the operating profit by deducting the expenses from the gross profit:
£50,000 - £30,000 = £20,000
You may also come across the term net profit. Operating profit is earned from carrying out a businesses normal operations e.g. producing confectionery, or selling Christmas cards. Net profit takes account of other sources of income and expenditure that are not involved in normal operations e.g. interest paid on loans and interest received on having a positive balance in a bank account.
Turnover - is the value of sales made in a trading period. It is some referred to as sale revenue and is calculated by the average price of items sold x the number