trading, profit and loss accounts

• What is the purpose of profit and loss accounts?

  They provide a historic view of the business’s trading income and expenditure over the previous 12 months.
• What does the first section of a profit and loss account refer to?

  It is sometimes referred to as the trading account.
• What does the trading account show?

  It shows the sales of the business and the direct costs of making those sales, known as the cost of sales.
• What is gross profit?

  Gross profit is the figure left after taking the cost of sales away from the sales of a business.
• What is the normal practice for profit and loss accounts regarding the trading period?

  • Profit and loss accounts are typically produced for 12 months.
  • The 12 months can cover any consecutive months, not just January to December.
• What does the first line of a profit and loss account indicate?

  It gives the business’s trading income for the year.
• What are the different terms used for trading income?

  Trading income can be called sales, revenue, income, or turnover.
• What was the total sales for Frying Tonite in the year 2013–14?


  £96,500
• What are the direct costs included in the cost of sales for Frying Tonite?

  Direct costs include fish, oil, potatoes, etc.
• How do you calculate the cost of sales?

  Cost of sales = opening stock + purchases – closing stock.
• What is the cost of sales for Frying Tonite?

  £27,800
• How is gross profit calculated for Frying Tonite?

  Gross profit is calculated by taking the cost of sales away from sales.
• What is the gross profit for Frying Tonite?

  £68,700
• What does gross profit indicate about a business?

  • It indicates how efficient the business is at making and selling its product.
  • A higher gross profit does not necessarily mean better efficiency, as larger businesses may have higher figures.
• What is net profit often referred to as?

  Net profit is often referred to as 'the bottom line' in business.
• Why is net profit considered 'the bottom line'?

  It is the actual bottom line on a profit and loss account and tells us the actual profits after all costs have been paid.
• How is net profit calculated for Frying Tonite?

  Net profit is calculated by taking total expenses away from gross profit.
• What is the net profit for Frying Tonite?

  £30,110
• What are expenses in the context of a profit and loss account?

  • Expenses are the indirect costs that the business incurs.
  • Examples include rent, interest payments, and electricity.
• What is the total expenses figure for Frying Tonite?

  £38,590
• What is the purpose of the appropriation account?

  It shows how the profit or loss is distributed after paying tax on profits.
• How much corporation tax does Frying Tonite have to pay?

  £6,000
• What is the profit after tax for Frying Tonite?

  £24,110
• How much dividends does Frying Tonite pay out to its shareholders?

  £8,000
• What is the retained profit for Frying Tonite?

  £16,110
• How does the presentation of profit and loss accounts vary between different types of businesses?

  • Unlimited businesses (like sole traders) have straightforward accounts without an appropriation section.
  • Limited companies (private and public) have more complicated accounts and must provide an income statement.
• What are other names for a profit and loss account?

  • Profit and loss statement
  • Statement of revenue and expense