Unit 2 P5
1. Explain the purpose and use of a profit and loss account: The purpose of the profit and loss account is to: Show whether a business has made a PROFIT or LOSS over a financial year. Describe how the profit or loss arose – e.g. categorising costs between "cost of sales" and operating costs
2. Explain why it is important for a business to prepare a Profit and loss account: Business keeps various types of financial record to monitor its performance and ensure that taxes are paid. These include profit and loss accounts. A trading, profit and loss account shows the business's financial performance over a given time period, eg one year.
Sample trading, profit and loss account
Sales revenue
£80,000
Less costs of sales
£50,000
Gross profit
£30,000
Less other expenses
£20,000
Net profit
£10,000
3. Identify and explain each section of the profit and loss Account:
a. Sales/Turnover: Your sales turnover is the total amount of goods, products or ideas sold within a given time frame, usually 12 months. The amount is usually expressed in monetary terms but may also be in total units of stock or products sold.
b. Cost of sales/ Cost of good sales/: The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labour costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs.
c. Gross profit: Gross profit is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale. To calculate gross profit: examine the income statement, take the revenue and subtract the cost of goods sold.
d. Operating expenses: Operating expenses are those expenditures that a business incurs to engage in any activities not directly associated with the production of goods or services (see an alternative definition at the bottom). These expenditures are the same as selling,
2. Explain why it is important for a business to prepare a Profit and loss account: Business keeps various types of financial record to monitor its performance and ensure that taxes are paid. These include profit and loss accounts. A trading, profit and loss account shows the business's financial performance over a given time period, eg one year.
Sample trading, profit and loss account
Sales revenue
£80,000
Less costs of sales
£50,000
Gross profit
£30,000
Less other expenses
£20,000
Net profit
£10,000
3. Identify and explain each section of the profit and loss Account:
a. Sales/Turnover: Your sales turnover is the total amount of goods, products or ideas sold within a given time frame, usually 12 months. The amount is usually expressed in monetary terms but may also be in total units of stock or products sold.
b. Cost of sales/ Cost of good sales/: The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labour costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs.
c. Gross profit: Gross profit is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale. To calculate gross profit: examine the income statement, take the revenue and subtract the cost of goods sold.
d. Operating expenses: Operating expenses are those expenditures that a business incurs to engage in any activities not directly associated with the production of goods or services (see an alternative definition at the bottom). These expenditures are the same as selling,