The purpose of the profit and loss account is to:

  • Show whether a business has made a PROFIT or LOSS over a financial year.
  • Describe how the profit or loss arose – e.g. categorising costs between "cost of sales" and operating costs.

A profit and loss account starts with the TRADING ACCOUNT and then takes into account all the other expenses associated with the business.

Trading account

The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year.

An example of the trading account of a business would look this:

Trading account for XYZ Ltd for the year ended 31 March 20X5:

Note that the closing stock figure would appear in the balance sheet under Stock.

Profit and loss account

The trading account now has all the other expenses now deducted.

It would look like the table below:

Trading, profit and loss account for XYZ Ltd for the year ended 31 March 20X5

Notes on the items in the profit and loss account:

Sales: the amount of money generated by sales

Cost of sales: the cost of making the goods or buying them

Gross profit: sales less direct costs of sales

Overheads and expenses: Costs not directly involved in the production process (indirect costs)

e.g.

Cost of premises e.g. rent, insurance, repairs

Office costs e.g. stationery, postage, computer maintenance, staff salaries and wages

Sales and marketing costs e.g. salaries of salesmen, advertising

Finance costs e.g. bank charges, interest on bank loans

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