Profit and loss accounts - EduqasConstructing a profit and loss account

Profit and loss accounts are normally produced every year, showing the profit or loss made over the past 12 months. This is known as the trading period.

A business will have to:

• calculate revenue for the trading period by working out how many products they sold and what price they sold them for
• calculate the costs of the business for the trading period
• split the costs into cost of sales and expenses.

Interpreting profit and loss accounts

Comparison with last year

One way a business can use a profit and loss account, is to compare their figures against how the business performed in the previous year. This will show them if they have improved the business by increasing the revenue, gross or net profit.

Comparison with competitors

Another way a business can use profit and loss accounts is to compare their data to their competitors. Businesses that are making more revenue than their competitors will have more market share. Businesses that are making more net profit may be a more attractive investment to shareholders or have more finance available to develop new products.

Stakeholders and profit and loss accounts

There are many stakeholders that will be interested in the profit and loss account of a business.

• Managers will use profit and loss accounts to help them make decisions.
• Shareholders will use profit and loss accounts to help them decide whether or not to invest money into the business or whether to sell their shares.
• Employees could use a profit and loss account to support their demands for higher wages. They can also see how secure their job is likely to be.
• The government will use the profit and loss account to see how much tax the business needs to pay.