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Essay On Profit And Loss

Profit and Loss Account

In most businesses profit is the driving force behind the decision process. The amount of profit made by the firm is often an indicator of performance. The level of profit is measured / calculated through the profit - loss account.

The profit and loss account illustrates all the business transactions over the time period (usually one year).

The profit - loss account is divided into 3 sections. These sections are combined to create the final account. The sections are;

Trading account

Profit and loss account

The profit and loss appropriation account

The Trading Account

The trading account highlights the revenue earned from selling products (turnover) and the cost of these sales. This section allows you to calculate GROSS PROFIT

Gross Profit = turnover - cost of sales

Profit and loss account

After calculating gross profit, the profit and loss account will allow you to calculate information upto and including PROFIT ON ORDINARY ACTIVITIES BEFORE TAX.

This includes;

OPERATING PROFIT (NET PROFIT) = Gross profit - expenses

PROFIT ON ORDINARY ACTIVITIES BEFORE TAX = Operating Profit + non-operating income - interest payable

The Profit and loss appropriation account

This section highlights how the company's profit or loss is distributed. This section highlights the PROFIT AFTER TAX and the RETAINED PROFIT CARRIED FORWARD.

PROFIT AFTER TAX = profit on ordinary activities before tax - corporation tax

RETAINED PROFIT CARRIED FORWARD = profit after tax - dividends

Profit and Loss Account

This page tells you all about what a profit & loss account is and how it is constructed. The profit and loss account differs significantly from the balance sheet in that it is a record of the firm's trading activities over a period of time whereas the balance sheet is the financial position at a moment in time.


A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity

Assets – things they own

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Liabilities – things they owe (suppliers, loans/overdraft, and mortgage)

Trading profit and loss word meaning

Trading profit and loss statement – A trading, profit and loss account shows the business’s financial performance over a given time period.

1. Turnover – the amount of money taken by a business in a particular period, for instance Abscon Ltd have a turnover of £1500,000 in 20014 and £1300,000 in 2013

2. Cost of sales – on an income statement, the cost of purchasing raw materials and manufacturing finished products, there cost of sales in 2014 totalled to £860,000

3. Opening stock – stock of an item at the beginning of the financial year, at 2014 they had £100,000 of opening stock

4. Purchases – To obtain in exchange for money or its equivalent; buy.

5. Closing stock – a business’s remaining stock at the end of the financial year. It includes finished products, raw materials or work in progress and is deducted from the period’s costs in the balance sheets.

6. Gross profit – The difference between revenue and the cost of producing goods or services sold. It is sometimes expressed as a percentage.

7. Expenses – money or costs incurred in a business’s efforts to generate revenue, representing the cost of doing business

8. Wages – a fixed regular payment earned for work or services, typically paid on a daily or weekly basis

9. Salaries – a fixed regular payment, typically paid on a monthly basis but often expressed as an annual sum, made by an employer to an employee, especially a professional or white-collar worker

10. Operating profit – profit from business operations (gross profit minus operating expenses) before deduction of interest and taxes

11. Net interest – the total amount of interest paid by a business on funds it has borrowed less the amount of income earned in interest on amounts it has lent out or invested

12. Profit before tax – company’s profits before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax.

13. Corporation tax – tax imposed on companies’ profits

14. Profit after tax – The net amount earned by a business after all taxation related expenses have been deducted

15. Dividend – a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).

16. Retained profit – Retained profit is the profit kept in the company rather than paid out to shareholders as a dividend. Retained profit is widely regarded as the most important long-term source of finance for a business.

Balance Sheet

Balance sheet – A balance sheet shows the value of a business on a particular date. A balance sheet shows what the business owns and owes for the last day of the financial year.

1. Fixed asset – an assets which is not consumed or sold over the course of the business, such as premises and fixtures and fittings.

Premises – a house or building, together with its land and outbuildings, occupied by a business or considered in an official context

1. Fixtures and fittings – forming part of the setting of the shop which an organisation conducts its business, such as a plant or chairs

2. Current assets – assets that are expected to be converted into cash within one year in the normal course of business. Can include stocks, debtors and bank

3. Stocks – the total merchandise that is kept on hand by a business

Debtors – somebody who the business owes money to

1. Bank – an arrangement made with a bank whereby one may deposit and withdraw money and in some cases be paid interest. Abscon Ltd had £750,000,000 in their bank in 2014.

2. Current Liabilities – amounts due to be paid to creditors within twelve months such as creditors, taxation and dividends

3. Creditors – a person or company to whom money is owing. Taxation – money paid as tax

Dividends – money that is paid to shareholders

Net assets – total assets minus total liabilities

1. Long term liabilities- A category of debts on a company’s balance sheet that do not need to be repaid during the upcoming twelve months, but that instead need to be repaid in a year or more such as mortgage and capital employed

Mortgage – a legal agreement by which a bank lends money at interest in exchange for taking title of a property

Employment of capital – The total amount of share capital and debt that a company has and uses

Shareholders – somebody who owns a share in a business

Share capital – part of the capital of a company that comes from the issue of shares

Profit and loss account – A trading, profit and loss account shows the business’s financial performance over a given time period.