Profit and Loss Accounts
A profit and loss account shows how much money the business has made (over the period that the accounts cover) and how much money it cost the business to do so. The profit and loss accounts cover an accounting period; usually one year. The profit and loss account is made up of three parts:
1. Gross Profit - This is the amount of money received from the sale of products (and/or services) minus the cost of sales. This figure only relates to goods sold in the accounting period that the profit and loss account covers. The gross profit section of the profit and loss account is known as the trade account as it covers trading activity. Gross profit does not cover overheads and expenses that do not relate directly to the production or purchase of goods.
Gross Profit = Sales Revenue MINUS Cost of Sales
2. Net Profit - This section takes into account all of the m