Understanding the Profit and Loss AccountAQA AS BUSINSESS

TEASER

What is meant by the term ‘Market Share’?

How is Market Share calculated?

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)

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.

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?

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

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.

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

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

Exam Question Practice

Question 2 c from Module 1 January 2012.

15 minutes

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.