The profit and loss account is a statement of the amount of profit or loss a business has made in a period of time. For convenience and ease of interpretation the information is contained in three sections.
1. The trading account This includes the revenue from sales and the costs associated with producing those sales.
· Revenue - Cost of sales = Gross profit
2. The profit and loss account Payments such as interest and directors' fees are deducted from the gross profit to give net profit before tax. Tax is then deducted to give net profit after tax.
Table 7 A profit and loss account
Profit and loss account for year ending 30 June 2005
£000 £000 £000
SALES
Cost of sales
GROSS PROFIT
Less OVERHEADS
Administration
Wages and salaries
Stationery
Heat and light
Rates, rent, insurance
Depreciation
Finance:
Interest
Bad debts
Selling:
Salaries
Distribution
Advertising
Net profit
Corporation tax
Net profit after tax
Ordinary share dividend
Reserves
3. The appropriation account To appropriate means to set aside for a purpose or to make something the private property of an individual or an organization. The appropriation account tells interested parties how the business has used the net profit after tax. A company's appropriation account would include the amount distributed to shareholders, the amount transferred to general reserve and the retained profit. The presentation of a profit and loss account is shown in Table 7.
