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© Boardworks Ltd of 24 Profit and Loss Teacher’s notes included in the Notes PageFlash activity. These activities are not editable. Icons key: For more detailed instructions, see the Getting Started presentation Profit and Loss Unit 2: Business Finance Web addressesExtension activities Sound © Boardworks Ltd of 24
© Boardworks Ltd of 24 Learning objectives 2 of 24© Boardworks Ltd 2006 Why do businesses record their profit or loss? What is a financial year? What is a profit and loss account? What parts make up a profit and loss account? How are the figures calculated in a profit and loss account?
© Boardworks Ltd of 24 Every business – however small or large – aims to make a profit. For a business to be able to calculate whether it has made a profit, it must keep a profit and loss account. Profit and loss accounts Why is producing a profit and loss account useful for a business? A profit and loss account summarizes all of a business’s revenue and costs over a period of time, usually a year. The business then uses the figures in it to work out how much profit or loss it made.
© Boardworks Ltd of 24 A business produces a profit and loss account because: Profit and loss it is a legal requirement it sums up the performance of a business to its stakeholders it can be compared with the previous year’s performance investors or lenders need to see one before making deals it can help to forecast future profits and helps with planning. How could ICT help a business to prepare its profit and loss account?
© Boardworks Ltd of 24 The financial year The UK’s financial year runs from 6 April to 5 April. Businesses are legally required by the government to produce annual profit and loss accounts at the end of each financial year for the Inland Revenue. At the end of each financial year private limited (Ltd) and public limited (PLC) companies must produce audited annual accounts for the Inland Revenue – for it to calculate how much tax they owe. Do you know when the financial year begins and ends in the UK?
© Boardworks Ltd of 24 Profit and loss account A profit and loss account can be presented in different ways, but many businesses divide it into three distinct sections: the trading account the profit and loss account the appropriation account. It can be recorded by hand into an accounts ledger, or entered into a computer spreadsheet or accounts package.
© Boardworks Ltd of The trading account The first section of the profit and loss account is called the trading account. It shows the revenue the business earned from sales, the cost of production and changes in stock. The business uses this data to work out how much gross profit it has made.
© Boardworks Ltd of 24 The layout of a trading account What will the closing stock become in the following year’s trading account?
© Boardworks Ltd of 24 Calculating the trading account Can you remember the formulae needed to complete a trading account? Sales revenue £ £ Opening stock Purchases Closing stock Cost of sales Gross profit opening stock + purchases - closing stock = cost of sales sales revenue - cost of sales = gross profit
© Boardworks Ltd of 24 Completing a trading account
© Boardworks Ltd of The profit and loss account The second section is called the profit and loss account as it is where the net profit before tax (or loss) is calculated. The profit and loss account records the business’s expenses or overheads so that the operating profit can be calculated.
© Boardworks Ltd of 24 The layout of the profit and loss account
© Boardworks Ltd of 24 Calculating a profit and loss account Can you remember the formulae needed to complete a trading account? Gross profit £ £ Expenses Salaries/wages Rent Utilities Equipment Other Operating Profit Interest on loans Net profit before tax Total expenses Total expenses = the sum of all the expenses Gross profit - total expenses = operating profit Operating profit - interest on loans = net profit before tax
© Boardworks Ltd of 24 Completing a profit and loss account Why is it useful for a business to work out its operating profit?
© Boardworks Ltd of The appropriation account The third section of the profit and loss account is the appropriation account. It shows exactly what has happened to the net profit before tax the business made. It shows the tax the business had to pay (corporation tax if it is a company or income tax if not). Then it shows the dividends it paid to its shareholders and any retained profit it kept for reinvestment.
© Boardworks Ltd of 24 The appropriation account Write a sentence to describe each term in your own words.
© Boardworks Ltd of 24 Calculating a trading account Can you remember the formulae needed to complete an appropriation account? Net profit before tax £ £ Corporation tax Profit after tax Dividends Retained profit Net profit before tax - corporation tax = profit after tax Profit after tax - dividends = retained profit
© Boardworks Ltd of 24 Completing an appropriation account
© Boardworks Ltd of 24 Who uses a profit and loss account?
© Boardworks Ltd of 24 Using ICT
© Boardworks Ltd of 24 Profit and loss account activity Complete this profit and loss account by entering the missing values into the coloured cells.
© Boardworks Ltd of 24 Question time! 1.What is another name for a business’s sales revenue? 2.Does the money spent on materials affect the gross profit figure only, the net profit figure only or both profit figures? 3.What is the formula for profit after tax? 4.Which type of profit shows how successful the business activity has been?
© Boardworks Ltd of 24 Who wants to be an A* student?
© Boardworks Ltd of 24 Glossary
Budgets Teacher’s notes included in the Notes PageFlash activity. These activities are not editable. Icons key: For more detailed instructions, see the.
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