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Get to Grips With Book Keeping: The trading, profit and loss account

by Andy Lymer and Nishat Azmat

The preparation of the trading, profit and loss account is carried out from the details listed in the trial balance, i.e. specifically the amounts which relate to the operating expenditure and operating revenues of the business. The operating expenditure will include items such as purchases, heating and lighting, telephone and salaries. The revenue will include all sales, both cash and credit which the business made trading for the financial period and also any non-trading income it has earned (e.g. interest on its bank accounts).

At the top of the trading, profit and loss account is the calculation for gross profit. This is calculated by taking the total sales figure and deducting the cost of sales figure. The gross profit represents the profit from simply buying and selling goods or services. The bottom part is where the operating profit is calculated, by deducting all operating expenditure from the gross profit. The operating profit represents the wealth generated during the period being summarised by the account and after both tax and interest is deducted the remainder belongs to the owner(s).
All expenses should ideally be matched to the same period in which the revenue to which the expenses relate to are also included. Thus the Matching convention is important when preparing this statement.

An important fact to remember is that the net profit figure will normally be different from the net cash figure, as both cash and credit items are included in the trading, profit and loss account.


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