3.4 Profit and Loss accounts
What is profit and how is it made?
 Profit is the money that a business makes over a particular
period of time. It is the difference between the selling price of
a product or service and the cost of supplying it.
 profit = sales revenue – costs
 “Sales Revenue” or “Turnover” mean exactly the same thing:
the money received from doing business – normally by selling a
product or service.
 sales revenue = quantity of goods sold x selling price
Costs
 Costs are associated with providing the normal dayto-day business activity. These costs are therefore
referred to as revenue expenditure. Other costs
(capital expenditure) aren’t included when
calculating profit.
 Costs of sales (labour, raw materials, packaging)
 Overheads (rent, marketing, power, administrative
staff, loan repayments, transportation, etc)
Gross Profit and Net Profit
 Profit is the money that a business has left after it has
subtracted the revenue expenditure form sales
revenue that it receives from customers, within a
given time period.
 Profit is normally split into categories:
 gross profit = sales revenue – cost of sales
 net profit = gross profit - overheads
Making use of net profit
 Net profit is the most important figure that a business
will look at, as this is the profit that it can keep.
Except for taxation, there are no more costs that
need to come off the net profit figure.
 A business must now decide whether it wishes to
retain the profit for later use, or distribute it to
shareholders through dividends, or do a bit of both.
The Profit and Loss Account
 The Profit and Loss Account, is a formal statement
that details the profit a business makes over a
particular period (usually a year).
 Potential investors use the P&L account to see how
much money it is prepared to pay them, in the form
of dividends.
 Sole traders and partnerships also need to prepare a
P&L account, although it tends to be slightly
different, as these types of business do not pay
dividends.
A simple Profit and Loss account
$ (millions)
Sales revenue
500
Cost of goods sold
260
Gross Profit
240
Expenses
160
Net profit before interest & tax
80
Interest
10
Net profit before tax
70
Tax
14
Net profit after interest and tax
56
Dividends
26
Retained profit
30
Making decisions
 A business can make a number of decisions to help it
achieve more profit:





Increasing the amount of revenue
Order raw materials in bulk
Use cheaper raw materials
Improve production efficiency
Cut down on overheads
Example 1
Solution for Taste of Asia plc
Taste of Asia PLC
Profit and loss account for Taste of Asia PLC for the year
$m
Sales revenue
80
Cost of goods sold
45
Gross profit
35
Expenses
15
Net profit before interest and tax
20
Interest
5
Net profit before tax
15
Tax
3
Net profit after interest and tax
12
Dividends
10
Retained profit
2