The Trading, Profit and Loss Account

Question 1

What are Profit & Loss Accounts?

What do they show?

Answer 1

• The difference between the firms income and the cost of running the business over the period of a year
• How a business is performing

Question 2

What are the three sections in Profit & Loss accounts?

Answer 2

• The trading account
• The Profit & Loss account
• The Appropriate account

Question 3

What else is a Trading, Profit & Loss account called?

Answer 3

An Income Statement

Question 4

What is a Trading Account?

Answer 4

It records the firms Gross Profit or Loss

• Turnover (or revenue) records the value of all products sold that year
• Cost of sales records how much the products cost to make during the year - the direct costs
• Adjustment for stock held,

Question 5

What if Gross Profit?

Answer 5

The difference between:
The revenue from selling &
The direct costs of making it

Question 6

What is a Profit & Loss Account?

Answer 6

Records all the indirect costs of running the business
(Does not inc the cost of buying assets, like machinery but does inc the cost of using & repairing or replacing them)

Question 7

What is done to set aside money to replace machinery? & What is this called.

Answer 7

• Firms set aside money each year to buy new replacements.
  They work out how long the item will last & spread the cost of replacement over that time.
• This is called Depreciation

Question 8

What is Operating Profit?

Answer 8

The money left after paying all the costs of running the business

Question 9

What is Net Profit?

Answer 9

True Profit

The total after any interest paid or received is included

Question 10

What is the Appropriation Account?

Answer 10

Only relevant for Limited Companies
It records where profit has gone - 
-Gov, as TAX
-Shareholders as Dividends, 
-Kept in the business as "Retained Profit"

Question 11

What can the Profit & Loss accounts be used for?

Answer 11

To assess how a business performed that year

Question 12

Who might be interested in the Profit & Loss Accounts of a company?

Answer 12

Anyone with an interest in the firms performance:
- Existing shareholders (for a share of any profits) & see how well directors are running the business
- Potential shareholders, to see if co is worth investing in
-Employees, could they get a payrise or be made redundant
The government, profit = more tax!