Profit And Loss And Balance Sheets Page 11
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26The Profit And Loss Account
Terminology
A profit and loss account always covers a
Cost of sales is the cost of selling goods or
particular period. This may be a day, week,
services. It will include the cost of materials
month, quarter, half-year or yearly period.
and may also include direct wages costs or
To prepare a profit and loss account you
power costs.
need to know the following information:
Cost of sales
=
.
Opening stock at the start of the period
Stock at start
+
Purchases
(valued at cost price)
-
Stock left at end
.
Total value of purchase invoices you
receive for the period.
Gross profit is the profit made by selling
.
The cost price of stock in hand at the end
goods or services
before
deducting the
of the period.
other (fixed) costs of the business.
.
The rate of depreciation of equipment.
Gross profit
=
.
The value of all
pre-payments
(things you
Income from sales
Cost of sales
-
have paid but not received full value of, like
insurance paid in advance) and
accruals
(things you have received but not paid for
Percentage cost of sales measures the
(like telephone use or heating).
ability of the business to cover its costs.
Many businesses are expected to have a
higher or lower ’% cost of sales’ and people
appraising them will judge a business
proposal by these expectations.
Gross profit
Percentage
x
100
=
Income from sales
cost of sales
Stock turnover is another way in which bank
managers (for instance) or other financial
experts analyse business performance. It’s
the rate at which goods are being sold. It
is calculated by:
Cost of sales
(Opening stock
x
closing stock)
/
2
=
Rate at which stock has turned
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