Profit and Loss Account - Notes - Business Accounts - Accounting and Finance - Business Studies

Looks at the construction of the profit and loss account and how it differs from the balance sheet.

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.

The profit and loss account looks at how well the firm has traded over the time period concerned (usually the last 6 months or year). It basically shows how much the firm has earned from selling its product or service, and how much it has paid out in costs (production costs, salaries and so on). The net of these two is the amount of profit they've earned. In essence this is what the P & L account shows, it just shows it in more detail!

A profit and loss account would usually be made up as follows:-

£ million
Turnover (sales revenue) 500
less Cost of goods sold (200)
Gross profit 300
less other costs @ (100)
Trading / operating profit 200
****
Profit for shareholders (dividends) 75
Retained profit 125

@ These other costs may include marketing and distribution costs, office costs and so on. They are also known as indirect costs or overheads.

**** In here may also be included any other income or expenses. These may include interest - paid or received - tax, extraordinary items (profits from selling assets or parts of the company) and so on.

The final retained profit figure is the one that goes to the balance sheet as a source of funds for the company to use. This retained profit may be used to buy fixed assets (machinery, equipment etc.) or it may remain as current assets (cash in the bank perhaps).

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