Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Terms used in the Trading and Profit and Loss account/Income Statement
Gross profit
- is the excess of sales over the cost of goods sold
- If the amount of cost of goods sold is more than the amount of sales the result is a gross loss
- Gross profit is found in the Trading Account section of the Trading and Profit and Loss Account
- The main purpose of the Trading Account is to calculate gross profit
- Gross profit is calculated only on goods that have been sold
- It is a way of calculating how much profit has been made on each $1 of sales
Net profit
- Is found in the Profit and Loss section of the Trading and Profit and Loss Account
- Net profit is found by adding any other revenue that a business has made for example rent received etc to gross profit and subtracting all the other expenses that a business has incurred for example rent paid, wages and salaries etc
- If the expenses exceed gross profit plus any other revenue then the result is known as net loss
Closing stock
- is found in the Trading Account section of the Trading and Profit and Loss Account
- This is the amount of goods that has not been sold at end of the trading period
- In the real world this figure is found by carrying out a stock taking exercise to find out the amount of goods unsold at the end of the period before the Trading and Profit and Loss Account is prepared
- In the exam this figure is usually supplied by the examiners except in Incomplete Records questions which will be looked at
Cost of goods sold
- this figure is found in the Trading Account Section of the Trading and Profit and Loss Account
- It is found by adding opening stock that we began with to purchases and
- subtracting closing stock that is unsold at the end of the trading period
- Cost of goods sold is also known as the Cost of sales
- It also includes all the costs that were incurred by the business in bringing the goods into the business and bringing them into a salable condition
- This concept will be looked at in details in later chapters
Opening stock
- is found in the Trading Account section of the Trading and Profit and Loss account
- It is the amounts of goods that remained unsold at the end of the previous trading period
- This is the amount of stock that we had at hand when we started trading in the current period
Expenses
- These are costs that are incurred during the course of running the Business
- They are deducted from income to obtain the profit
To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.