Net Profit

Gross profit is not the actual profit of the business.

The real profit of the business is the amount which remains after deduction of operating expenses.

Net Profit = Gross Profit – Operating Net Profit = Gross Profit – Operating ExpensesExpenses

Preparation of the Profit and Loss Account

Gross profit/(loss) is brought down from the Trading Account to the credit/(debit) side the P&L Account.

Expenses accounts are closed and balances transferred to the debit side of the P&L Account.

Revenue accounts are closed and balances transferred to the credit side of the P&L Account.

(Revenue + Gross Profit) > Expenses = Net Profit (Revenue + Gross Profit) < Expenses = Net Loss

Preparation of the Profit and Loss Account

Dr Wages Account Cr

2002 $ 2002 $

Jul 27 Bank 600 Jul 31 Profit & Loss 600

Dr Interest Revenue Cr

Jul 31 Profit & Loss 850 Jul 15 Bank 850

Dr Profit & Loss A/C for the month ended 31 July 2002 Cr

Wages 600 Gross profit b/d 1,000

Net Profit 1,250 Interest revenue 850

1,850 1,850

P&L Account: Example

C. Ben, a trader, earned a gross profit of RM12,500 during the year ended 31 December 2002. His operating expenses and other revenue earned for the period were as follows:

RM

Transport 850

Rent expenses 4,500

Insurance on shop 345

Sundry expenses 125

Commission revenue 2,000

Interest revenue 466

P&L Account: Example

Dr Profit & Loss A/C for the year ended 31 Dec 2002 Cr

RM RM

Transport 850 Gross profit b/d 12,500

Rent expenses 4,500 Commission revenue 2,000

Insurance on shop 345 Interest revenue 466

Sundry expenses 125

Net profit 9,146

14,966 14,966

Dr Capital Account Cr

Jan 1 Balance 15,000

Dec 31 Net profit 9,146

Net Loss: Example

L. Huang started a trading business on 1 August 2002 by investing RM14,000 in cash. During the first six months of operations, he made a gross profit of RM3,700. His operating expenses during the same period included rent expenses RM1,800, wages RM2,800 and commission expenses RM500. Revenue in the form of rent earned amounted to RM640.

Net Loss: Example

Dr Profit & Loss A/C for the year ended 31 Jan 2003 Cr

RM RM

Rent expenses 1,800 Gross profit b/d 3,700

Wages 2,800 Rent revenue 640

Commission expense 500 Net loss 760

5,100 5,100

Dr Capital Account Cr

2003 2002

Jan 31 Net loss 760 Aug 1 Cash 14,000

Balance c/d 13,240

Lecture Exercise

1. Wong & Leong Consultants had the following account balances extracted from their books as at 31st December 2002:

RM

Consulting Revenue 80,000

Salaries Expense 40,000

Rent Expense 6,000

Telephone Expense 2,000

Advertising Expense 500Prepare the Profit & Loss Account for the year ended 31st December 2002.

(Net Profit $31,500)

Dr Cr

RM RM

Salary expenses

Rent expenses

40,000 Consulting revenue 80,000

Telephone expenses 2,000

Advertising expense

Net profit

500

31,500

80,000 80,000

Dr Capital Account Cr

2002 RM

Dec 31 Net profit 31,500

Wong & Leong ConsultantProfit & Loss Account For the year ended 31 December 2008

6,000

RM RMConsulting revenue 80,000

Less: ExpensesSalary 40,000 Rent 6,000 Telephone 2,000 Advertising 500 (48,500) Net profit 31,500

Profit and Loss Acount For the year ended 31 December 2008

Wong and Leong Consultant

Lecture Exercise

2. Prepare the Profit & Loss Account for the year ended 31 July 2002 from the following information:

$

Carriage Outwards 440

Rent received from sub tenant 1,200

Advertising expense 250

Wages and salaries 2,160

Sundry expense 195

Gross loss b/d 1,780

(Net Loss $3,625)

Trading and Profit & Loss Accounts in a Combined Account

Trading and Profit and Loss Accounts can be shown under one combined heading, with the Trading Account being the top section and the Profit &

Loss Account being the

lower section of this

combined account.

Horizontal Format

Vertical Format

As you can see from the earlier slides, a Trading and Profit and Loss Account can also be called an Income Statement.

As you can see from the earlier slides, a Trading and Profit and Loss Account can also be called an Income Statement.