An introduction to the Profit and Loss Account. Part of the online course as delivered by www.freedomroadcollege.moonfruit.com.

1. Understanding the Profit
and Loss Account
AQA AS BUSINSESS

2. TEASER
 What is meant by the term ‘Market Share’?
 How is Market Share calculated?

3. LESSON OBJECTIVES
 1. To be able to define the term Profit. (KNOWLEDGE)
 2. To be able to distinguish between Net Profit and Gross Profit as a
measurement of business performance. (APPLICATION)
 3. To begin to be able to give advice as to how profits may help a business
to grow. (ANALYSIS)

4. What are profits?
 A Dictionary Definition of Profit
 a financial gain, especially the difference between the amount earned
and the amount spent in buying, operating, or producing something
 Whilst profit is a financial gain, it is important not to confuse it with Cash.
They are different measurements.

5. How is Profit Presented
 Profit is usually presented in the form of a Profit and Loss Account. (P & L)
 This is a statement of the activities of the business over a GIVEN PERIOD OF
TIME.
 Why is it important to stress the point of a given period of time?

6. The Calculation of Profit
 The calculation of profit may thus be broken down into 2 equations:
 1. Sales MINUS Cost of Sales = GROSS PROFIT
 2. GROSS PROFIT – Expenses = NET PROFIT

7. Keywords
 SALES – The income generated from selling goods or services to
customers.
 COST OF SALES – The cost of obtaining goods for sale or arranging a
service.
 GROSS PROFIT – The raw profit of an operation only taking into account the
costs of obtaining stocks.
 EXPENSES – The costs of the everyday operation of a business, will include,
rent, electricity, wages
 NET PROFIT – The real profit of an operation after taking into account all
costs.

8. Calculate Gross and Net Profit
 A Business Ltd has been set up and produces a version of Apple Bottom
Jeans and Boots with the Fur.
 In the first year of Operation it uses Denim costing £6000, Suede costing
£10000 and Fur costing £3500. The embroidery on the jeans was carried out
by staff at a cost of £12000. Rental of the production factory is £2400 per
month. Machinery used is rented at a cost of £3600 per month.
 A Business Ltd has a website for sales and also sells on the highstreet. Sales
for the year are £28000 online and £110000 on the highstreet.
 Calculate the Gross Profit and the Net Profit

9. Food for Thought…..
 It is common these days for prices to increase quite dramatically and this
may affect a business and its Profits.
 In year 2, the same results are expected except the following happens:
 - Prices of Denim rise by 25%
 - Wages increase by 10%
 - Rents increase to £3600 per month
 Calculate the Year 2 Gross Profit and Net Profit

10. Exam Question Practice
 Question 2 c from Module 1 January 2012.
 15 minutes

11. Homework
 Review your notes and rework the questions to ensure that you are happy
with the concepts.
 You should note anything you remain unsure about for the next lesson.