Business Accounts - Profit & Loss account

Question 1

What are the 2 financial statements prepared at year-end?

Answer 1

1. Profit and loss account
2. Balance sheet

Question 2

What financial information does a profit and loss account cover?

Answer 2

It records the income of a business minus expenses incurred in the same accounting period, producing a net profit or loss figure.

Question 3

What type of entries from the trial balance are included in a profit and loss account?

Answer 3

Only income and expense accounts are included - not assets, liabilities, or capital

Question 4

How is gross profit calculated in a profit and loss account?

Answer 4

Gross profit = total income - cost of sales

Question 5

How is net profit calculated in a profit and loss account?

Answer 5

Net profit = gross profit = total expenses (excluding purchase)

Question 6

How is cost of sales calculated in a profit and loss account?

Answer 6

Opening stock + purchases - closing stock = cost of sales

Question 7

Is depreciation recorded in the profit and loss account?

Answer 7

Yes - although its a non-cash expense, depreciation is included as part of the business’ operating costs

Question 8

Why are expenses deducted after gross profit?

Answer 8

Because gross profit shows profit from trading activities, and the remaining expenses represent overhead that must be deducted to find net profit