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The profit and loss account

The step explores the profit and loss account, what goes into it and what the statement shows.
A hand with a coin hovering over the top

The statement of profit or loss is a summary of the business’s transactions (income and expense) for a given period. This is achieved by deducting all expenses from all income. If income exceeds expenses, this gives a profit. If expenses exceed income, this results in a loss.

Businesses aim to make a profit, however for various reasons, losses can be made. For the purpose of this course, we will just see whether a business makes a profit or loss – we do not need to go into the detail as to why for now.

Let’s remind ourselves of the different types of income and expenses a business can have, and the types of profit a business shows in this statement:

Sales revenue

This is income generated from the trading activities of the business. For example, when the business sells something.

Cost of sales

This is the cost of buying or producing the goods for resale. For example, a finished item purchased to sell on or parts / ingredients needs to make something before selling it on.

Gross profit

This is the profit remaining, after the cost of sales have been deducted from sales revenue. The bigger the profit the better of course!

Sundry income

Other types of income that aren’t generated by the primary trading activities of the business e.g. the business might rent some of their shop space to someone else, thereby earning rental income. This is still income but not arising from their core activity.

Expenses

These are the day to day running costs of the business, e.g. rent paid for shop space, gas bill or the phone bill.

Net profit or loss

The profit or loss remaining after expenses have been deducted.

I am hoping this all sounds familiar to you, from when we covered it in Week 1. If you would like a little reminder, don’t forget there is a short video in Step 1.4 (in Week 1) where you can remind yourself what a profit and loss account looks like.

You will also find a copy of the statement of profit or loss in the Downloads section at the end. Take a good look at it to remind yourselves where each of the above headings appears.

Do note, we have not covered inventory / stock (as can be seen in the statement) as yet – we will do though, as the course progresses.

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Introduction to Accounting and the Accounting System

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