Profit & Loss Account [Virtual Learning Arcade]

An explanation of how a profit and loss account is constructed as part of the profit and loss account simulation in the Virtual Learning Arcade.

Spotlight on the theory

The Profit & 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 a 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