Statement of Profit or Loss (Cambridge International A-Level Business)

The purpose of the statement of profit or loss

• The statement of profit or loss shows the income and expenditure of a business over a period of time - usually a year - and identifies the amount of profit made

Statement of profit or loss: key terminology and calculations

The structure of the statement of profit or loss

• The statement of profit or loss is divided into three parts

  • The trading account
  • The profit and loss account
  • The appropriation account

An example income statement

An example income statement, showing the trading account, profit and loss account and appropriations account

The trading account

• The trading account is where the cost of sales is deducted from sales revenue to calculate the gross profit

  • In 2024 Top to Toe Wellbeing Limited's sales revenue was £124.65m and its cost of sales were £18.92m

    • The gross profit for the period was therefore

equals space £ 124.65 straight m space minus space £ 18.92 straight m space

equals space £ 105.73 straight m

The profit and loss account

• The profit and loss account deducts a series of expenses to determine the operating profit for the period equals space £ 105.73 straight m space minus space £ 39.87 straight m space

equals space £ 65.86 straight m equals space £ 65.86 straight m space minus space £ 2.01 straight m space

equals space £ 63.85 straight m

• In 2024 gross profit was £105.73m and expenses were £39.87m

  • The operating profit was therefore

• The business also paid £2.01m interest

  • The profit before tax was therefore

• The business also paid £13.10m tax

  • The profit after tax for the period was therefore

equals space £ 63.85 straight m space minus space £ 13.10 straight m space

equals space £ 50.75 straight m

The appropriations account

• The appropriations account shows how profits are distributed for the period

  • In 2024 Head to Toe Wellbeing Limited distributed £13.95m to shareholders as dividends

    • £36.80m was therefore retained as profit

Amending the statement of profit or loss

• Making a change to one section of the statement of profit or loss has an impact on other sections

Worked Example Pershore Plumbers Ltd's accountant has sent the interim statement of profit and loss to Helen, the business owner. She has been asked to check the statement before it is sent to Companies House

Pershore Plumbers Ltd - Statement of profit or loss for the year ending 31st March 2025

Helen identifies three errors

• Sales revenue for the period was actually £889,540
• The business received a tax refund of £12,220 during the year
• The business paid dividends of £220,500 to shareholders

Recalculate the statement of profit or loss to reflect these changes.

(4)

Step 1: Calculate gross profit given the updated revenue figure

Gross space profit space equals space Revenue space minus space Cost space of space sales

equals space £ 889 comma 540 space minus space £ 310 comma 510

equals space £ 579 comma 030 (1)

Step 2: Recalculate operating profit

Operating space profit space equals Gross space profit space minus space Expenses

equals space £ 579 comma 030 space minus space £ 202 comma 630

equals space £ 376 comma 400 (1)

Step 3: Calculate profit for the year given the tax refund

Tax space equals space £ 66 comma 930 space minus space £ 12 comma 220 space equals space £ 54 comma 710

Profit space for space the space year space equals space Operating space profit space minus space Tax

equals space £ 376 comma 500 space minus space £ 54 comma 710

equals space £ 321 comma 790 (1)

Step 4: Calculate retained profit given updated dividends

Retained space profit space equals space Profit space for space the space year space minus space Dividends

equals space £ 321 comma 690 space minus space £ 220 comma 500

equals space £ 101 comma 190 (1)

Pershore Plumbers Ltd - Updated statement of profit or loss for the year ending 31st March 2025