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The profit and loss account is actually 3 different things all rolled into one! The names of these 3 sections are:
1. 2. 3.
To keep things simple, the Profit & Loss Account looks at all of the things that you have bought and sold across a year and takes a ay all of the costs you had to pay during that year!
"f you make more money than you have to pay out you are in profit and if you pay out more than you make then you are in loss!
The Trading Account is used to calculate the amount of (R*,, PR*-&T that a business makes! #rm!!!!!ok let$s sho you hat this actually means using %idney the &odgy %alesman to help us out!
%idney has en'oyed a good year but e no need to ork out ho much these items cost him to buy to help us calculate his profit!
-emember that this is %idney$s %ales -evenue and it is '*T his profit!
*P$'&'( ,T*). At the start of the year, %idney$s arehouse as almost empty! .e only had */,,,, orth of goods left!
)L*,&'( ,T*).
At the end of the year " have got only *0,,,, orth of stock left in my arehouse!
3losing stock is the value of the stock left in the business at the end of the year! "t is the amount of stock that is +',*L%! )*,T *- (**%, ,*L% The 3ost of 4oods %old figure helps us to ork out ho much money %idney has made from the buying and selling of stock during the year!
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0 1 2
(R*,, PR*-&T
9hat
4ross Profit sho s us the level of profit earned on the buying and selling of goods!
=#int. Thin3 about changing his suppliers and ma be changing the prices he charges his customers">
(k so hat is the Profit and Loss Account all about) T#$ PR*-&T & L*,, A))*+'T
Ahh actually sorry %idney but you do not have *0?,,,, to spend!
This figure is only your (R*,, PR*-&T figure!!!! e still need to take a ay all of %idney$s e@penses!
)an ou thin3 of !hat some of these e?penses might be?
%o you see hen e add all of these e@tra e@penses together they suddenly bring do n the amount of profit that %idney earned!
" had to pay my electric and gas bills, staff ages, rent for the arehouse and van hire!
9e take a ay all of the e@penses from his 4ross Profit to ork out his *P$RAT&'( PR*-&T! *P$RAT&'( PR*-&T 2 (R*,, PR*-&T A T*TAL $@P$',$,
#lectricity 1ill = */,+,, Telephone 1ill = *30+ 4ross Profit = *0?,,,, *+,+,,
*P$RAT&'( PR*-&T 2 8
-ight so "$ve made */?,B0+! 3an " spend all of this) '$T PR*-&T
7nfortunately not %idney!!!!!you still o e money to the bank and the 4overnment in the form of Ta@es!
%ole Traders & Partnerships pay &ncome Ta? 3ompanies pay )orporation Ta?
3an you ork out %idney$s 5et Profit using these figures)
(perating Profit = */,+,, "nterest 3harges = *30+ Ta@ 1ill = */,?+,
'$T PR*-&T 2 8 9hat is the name of the ta@ that %ole Traders and Partnerships must pay upon their profits)
APPR*PR&AT&*' A))*+'T
The Appropriate Account is the final section that e need to learn! This sho s us hat %idney decided to do ith his *C,00+ of 5et Profit!
9hen a business saves some money this is called R$TA&'$% PR*-&T! This can be used for future investment and means that they ill need to borro L#%% from a bank! "f %idney as a company he might have to pay %&C&%$'%,!
"$m going to save *0,,,,, and take out *B,00+ as my ages :called %RAW&'(,;!
9hat does a proper Trading, Profit & Loss Account look like)
8
,AL$, R$C$'+$ (pening %tock Purchases 3losing %tock 3(%T (8 4((&% %(L& (R*,, PR*-&T $@P$',$, #lectricity & 4as Aehicles :Petrol; Telephone -ent *P$RAT&'( PR*-&T L#%% "nterest 5#T P-(8"T 1? TAD L#%% Ta@ '$T PR*-&T A-T$R TA@ -#TA"5#& P-(8"T &"A"&% &-A9"54% 0,,,, > B,00+ 3,,,, F922E 0,+,, /0,00+ 0!C+, +,, 30+ +,+,, 1;9D2E /,,,, /0,,,, 0,,,, //,,,, 2;9:::
8
3+,,,,
TRADING ACCOUNT
APPROPRIATION ACCOUNT
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A Trading9 Profit and Loss Account is used to sho! the profit or loss made b a business. The full account contains three sections. The first section is called the GGGGGGGGGGGGGGGG Account. This sho!s the profit or loss earned b the bu ing and selling of goods o4er the ear. This account is used to calculate the GGGGGGGGGGGGGGG Profit and it does this b ta3ing a!a the )ost of (oods ,old from ,ales Re4enue. The )ost of (oods ,old is calculated b adding GGGGGGGGGGGGGGGGGG to the *pening ,toc3 le4els and then ta3ing a!a the )losing ,toc3 4alue. The second section of the account is called the GGGGGGGGGGGGGG & GGGGGGGGGG Account. This is used to calculate GGGGGGGGGGGGGGGG Profit !hich is !hen ou ta3e a!a e?penses from (ross Profit. An e?ample of an e?pense is GGGGGGGGGGGGGGGGGGGG. *nce ou 3no! the *perating Profit ou then ha4e to ta3e a!a &nterest and then GGGGGGGGGGG. This then gi4es ou the 'et Profit earned b the business. The final section of the account is called the GGGGGGGGGGGGGGGGGGGGG Account. This is used to sho! !hat the o!ners of the business actuall do !ith their profits. There are t!o common things that 'et Profits are used for. These are for
pa ing the shareholders GGGGGGGGGGGGGGGGGGGGG and the other one is !hen the o!ners ta3e a cut of the mone for themsel4es as GGGGGGGGGGGGGGGGGGGGGG.