Profit and loss accounts - EduqasProfit and loss accounts (income statements)

What is a profit and loss account?

A profit and loss account shows the revenue and costs of a business and these are used to work out whether or not the business has made a profit. They are also known as income statements.

The main components of a profit and loss account

• Sales revenue – this is the money coming into the business from selling goods or services. It can also be referred to as sales turnover.
• Cost of sales – these are the direct costs of supplying the goods or services such as wages, buying raw materials to make the products, packaging costs and energy costs such as gas and electricity.
• Gross profit – this is the revenue minus the cost of sales.

The equation for working out gross profit:

Revenue – Cost of sales = Gross profit

• Expenses (overheads) – these are the costs that do not change as production increases or decreases. This includes interest paid on loans, insurance, salaries and maintenance costs.
• Net profit – this is calculated by taking the expenses away from the gross profit. This is the final part of the profit and loss account. If the net profit figure is negative, the business has made a loss.

The equation for working out net profit:

Gross profit – Expenses = Net profit