The profit and loss account (income statement)
This brief post covers the basics of the profit and loss account. The profit and loss accounts lists all income and expenditure, with the difference being they profit or loss made by the business. The profit and loss account has two parts, albeit in the same statement. The first part account calculates the profit earned from buying and selling goods. This is called the Trading account.
Here’s an example of the layout.
Trading account for Red Books for year ended 31/12/2009
|
€/£ |
€/£ |
|
| Sales |
|
250,000 |
| LESS COST OF SALES |
|
|
| Opening stock |
20,000 |
|
| Purchases |
150,000 |
|
|
170,000 |
|
|
| Less closing stock |
30,000 |
|
| Cost of sales |
|
140,000 |
| Gross profit |
|
110,000 |
Here’s a brief explanation of each of the some of the items and terms above. First, there is the title of the account. It informs the user of the name of the statement (what), the name of the business (who) and the time period involved (when).
Sales: The amount of money earned by the business selling books in the past year i.e. Income. Sales returns/returns in may have to be subtracted to get this figure.
LESS COST OF SALES: this is a heading, which indicates that this calculation is going to be completed. This calculation will work out the cost of all the books that were sold in the year. It is calculated as follows
Cost of sales = opening stock + purchases – closing stock.
Opening stock: This is the value of stock left over from the previous year. This stock will be the first to be sold in the this year, thus it is a cost for this year (c.f. the accruals concept)
Purchases: This is the cost of all the new books bought during the year. (Additional costs like carriage in and import duty might be added to the purchase cost). Purchase returns/returns out may have to be subtracted.
Closing stock: This is the value of all the books left at the end of the year. It is subtracted from opening stock and purchases, as it does not form part of the goods sold during this year (c.f. accruals concept).
Cost of sales: This is the answer to the calculation of the cost of sales.
Gross profit: This measures the profit the business makes by buying and selling books. It is calculated as follows:
Gross profit = Sales – Cost of Sales
The second part, the profit and loss account calculates the profit the business has earned after allowing for all the expenses incurred in running the business. Here’s an example following on from the trading account above
Profit and loss account for Red Books for year ended 31/12/2009
| €/£ | €/£ | |
| Gross Profit | 110,000 | |
| LESS EXPENSES | ||
| Wages and salaries | 40,000 | |
| Depreciation | 20,000 | |
| Light, heat and telephone | 10,000 | 70,000 |
| Net Profit | 40,000 |
As you can see, the profit and loss account starts with the Gross Profit and deducts expenses to arrive at Net Profit. Net profit is the profit that is owed to the owner(s) of the business. In the case of a sole trader, this forms part of the capital of the business, whereas with a company the shareholders may be paid a dividend from available profits.
All other elements from the Trial Balance i.e. assets, liabilities and capital do not appear on the Profit and Loss account, but the balance sheet.
Martin's accounting blog 
This was so helpful, thank you so much
what is import duty?
Import duty is a tax paid on goods imported from another country. It is normally paid by businesses.
I would like to know where would I allocate customs duty on my income statement?
Customs duty is not normally shown separately. It would be included in purchases or whatever expense it has been paid on.
Where is custom duty recorded in financial statement ?
A post in the coming weeks will answer you query.
What value should my opening stock have in the trading profit & loss account? should it be at the purchase value from manufacturer or the anticipated selling value from sales to be made
It should be the cost (or purchase value as you say), and this could include other costs like shipping costs for example
Why we are doing opening stock less closing stock on companies profit and loss account?.what is the meaning of opening stock less closing stock? Opening stock comes from last year and closing stock from current year. Then why we minus this 2 items?
Opening stock from last year is assumed to be used this year, so is added (not subtracted as you say) to cost of sales this year. Similarly, closign stock is assume used next year, so is subtracted.
Wonderful breakdown. This was so clear! Thank you very much.
Very helpful.thanks
nice article written by author.salute to you sir.please share blog on balance sheet also