Terms used in the Trading and Profit and Loss account

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 Principles of Accounts Notes.