Profit and Loss accounts

Question 1

Define a profit and loss account

Answer 1

An accounting statement showing a business’ sales revenue over a trading period and all the relevant costs incurred in earning that revenue. (Income and
expenditure.)

Question 2

Explain cost of sales

Answer 2

All costs of production used. Any direct costs, such as raw materials,
wages, used in the production process.
Formula: Opening stock + Purchases – Closing Sales

Question 3

Explain net profit

Answer 3

It is the profit that belongs to the sole trader following the reduction of all expenses from the Gross Profit. The sole trader must pay income tax on this profit.
Formula: Gross Profit – Expenses

Question 4

Explain gross profit

Answer 4

The difference between the revenue from selling the product and the direct costs of making it.
Formula: Sales Revenue – Costs of Sales