Profit And Loss And Balance Sheets Page 19

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Exercise 2 : Sales And The Cost Of Sales
Once you have calculated the
sales
for the period you then need to calculate the cost of
generating the sales. This tells you the real value of the business’ activities in the period.
It is common when drawing up a profit and loss account to calculate the
gross profit
on
selling goods or services before going on to calculate the
net profit
or
pre-tax profit.
The first step in calculating
gross profit
is to calculate the
cost of sales.
This is calculated
as follows:
Cost of sales
=
Stock at the start of the period
+
Purchases
-
Stock at end
Note that when calculating the
cost of sales
we use the
cost
value of stock. We may also
wish to add in
direct costs
of making and selling goods such as labour, marketing, packaging
and power.
Gross profit
is calculated as follows:
Gross profit
=
Value of sales in the period
-
The cost of sales
P 231

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