The profit and loss
account
The profit and loss account is produced by
a business to show:
How much net profit has been made
How much net loss has been made
All the expenses for the year.
Net profit or loss for the financial year is
calculated as follows:
Gross profit – Expenses = Net profit or
loss
The profit and loss account is presented in
a vertical format.
Expenses
Expenses are the day-to-day running costs
that the business will have to pay.
Expenses are also known as revenue
expenditure.
The revenue expenditure for the year must
be listed in the profit and loss account.
Examples of expenses
Rent
Rates
Wages and
salaries
Heating
Lighting
Cleaning
Insurance
Repairs
Telephone
Discount allowed
Depreciation on
fixed assets
Legal fees
Example
Trading account and profit and loss account
£
£
Sales
130,000
Opening stock
8,000
Purchases
60,000
68,000
Closing stock
3,000
Cost of sales
65,000
Gross profit
65,000
Wages
20,000
Rent
5,000
Heating
1,000
General expenses
6,000
32,000
Net profit
63,000
Discount allowed
A business may allow a discount to a
debtor for early payment of the amount
owed by the debtor.
A business may use discount allowed to
improve the cash flow position.
Discount allowed will reduce the profit of
the business. It is an expense and must
be shown in the profit and loss account.
Discount received
A business may receive a discount from
trade suppliers for early payment of the
account.
Discount received will increase the net
profit.
Discount received is added to the gross
profit in the trading account and profit and
loss account.
Example: discounts
Profit and loss account
£
Gross profit
Discount received
Wages
General expenses
Discount allowed
Net profit
25,000
10,000
1,000
£
80,000
3,000
83,000
36,000
47,000
Carriage inwards and
outwards
Carriage inwards is added to purchases in
the trading account.
Carriage outwards is shown as an
expense in the profit and loss account.
A business may pay the cost of delivering
to customers. This is an expense of the
business.
Drawings
Drawings are a reduction in capital and must be
shown in the balance sheet.
Cash drawings will reduce the asset of cash
and not affect the profit.
Stock drawings will reduce the purchases in the
trading account.
The amount of drawings made by the owner is
not an expense of the business and must not be
shown in the profit and loss account.
Key points
The account layout must be learned because
this topic will be covered in much more detail.
Always use a ruler to underline headings and
accounts and present your work neatly.
Never enter fixed assets in the profit and loss
account. This is capital expenditure and will be
shown in the balance sheet.
It is very important to practise the trading
account and profit and loss account. Try Tasks
1–3.