• A business needs to keep track of all their
income - REVENUE and EXPENSES.
• Any money coming in to a business is
recorded as revenue.
• Any money going out of a business is
known as an expense.
• For a business to be profitable their
revenue must be greater than their
expenses.
• Businesses will generate a profit and loss
statement to calculate their annual
profitability.
Revenue (income)
• Sales – money from the sales of good s they
trade in – i.e. music shop CD’s
• Fees – money received from work done for a
client – also known as services rendered.
• Commissions earned – money received from a
client based on the value of the service.
• Interest received – from financial institutions.
• Dividends
• Rent
Expenses (costs)
• Wages –paid to employees
• Rent – paid for the use of a business premise
• Insurance – premiums paid to insurance
companies
• Rates and taxes – government and local
government charges
• Advertising and promotion
• Depreciation – the loss in value of assets that
occurs over time (computers)
• A capital item is not included in a profit or loss
statement.
• These are things such as a vehicle or a building.
They don’t directly bring revenue into a company
like selling an item or providing a service.
Prepare a profit and loss statement
for Jenny’s Jam Shop for June 30.
The following revenue and expenses
were recorded – Sales $546,000,
Interest Paid $3560, Wages
$297,800, Advertising $5890, Rent
$3400, Telephone $3789, Insurance
$5500, Water Rates $3900, Interest
received $560.
Cost Of Goods Sold
• The profit and loss statements that we just
looked at are rather simplified.
• They do not take into account the cost of
the items on the shelves of the shops.
• A business has to buy the goods – an
expense and then this needs to be taken
away from any income.
• There is a procedure that you need to
follow.
• To calculate the cost of goods sold, a business
counts its stock at the beginning and the end of the
year (stock take sale).
• These figures – plus the value of the goods
purchased during the year are used to calculate
the C.O.G.S.
A shop has stock valued at $220,000 at the start of the year. During the year they
purchase $278,000 worth of goods. When the shop did a stock take at the end of
the year the stock was valued at $189,000. Calculate the cost of goods sold during
that year.
Gross Profit and Net Profit
• To just calculate the COGS is not realistic
for a business – it needs to be
incorporated within a profit and loss
statement.
• Gross Profit is the difference between
sales and the COGS – the profit a
company makes on selling its goods.
• Net Profit is the profit margin once all other
costs have been taken out.
Make up a profit and loss statement for Fred’s Shop
has the following expenses and revenue for the year
ended June 30: wages $98500, Sales $885,000, rent
$22500, rates and taxes $2400, insurance $6675,
opening stock $138000, electricity $1900, purchase
of stock $99200, depreciation $3480, telephone
$1235, advertising $4445, closing stock $116590,
interest paid $568.
Fred’s Shop Profit and Loss Statement
Year ended June 30
Sales
Less – cost of goods sold
Opening Stock
Plus – purchases
Goods available for sale
Less – closing stock
$885,000
$138,000
$ 99,200
$237,200
($116,590)
$120,610
Gross Profit
Less – expenses
Wages
Rent
Insurance
Rates and Taxes
Electricity
Telephone
Depreciation
Advertising
Interest Paid
Net Profit
$98,500
$22,500
$6675
$2400
$1900
$1235
$3480
$4445
$568
$141,703
($120,610)
$764,390
($141,703)
$622,687