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BTEC BUSINESS – UNIT 2 P5
P5 Interpret the contents of a given profit and loss account and balance
sheet for a selected company
Akbar’s profit and loss account:
Interpretation:
Purpose and Use of a profit and loss account, applied to Akbar’s:
The profit and loss account is a financial statement that summarises the revenues, costs
and expenses which have occurred over a specific period of time, it is usually over a
financial year. The profit and loss account has two purposes. The two purposes are
analysing the amount of loss in a business and the amount of profit in the business. The
purpose of Akbar’s profit and loss account is for them to identify their profits and their
losses. From the profit and loss account Akbar’s can gain an insight of the amount of
money which they have made which is known profits and whether they have made a
loss. This also allows Akbar’s to track their performance in the business. For example if
Akbar’s want to know how much profit they have made over one financial year then
they will use a profit and loss account to find out the amount of profit they have made.
Key elements and purpose of each element:
There are five key elements to a profit and loss account. The five key elements are sales,
cost of sales, gross profit, expenses and net profit. Sales are a process of a business
selling its products and service. For example when Akbar’s sell their products, they
make a profit which means money comes into the business. Examples of Akbar’s making
sales are when they sell their food and drinks and when they allow their customers to
make party bookings. Sales is on the profit and loss account because Akbar’s will know
how much money they have made and whether they have increased in sales this year or
last year. On the profit and loss account it shows in the current year Akbar’s have
earned £2850 and last year they had £2675 through the sales and this shows Akbar’s
, A A ALI
BTEC BUSINESS – UNIT 2 P5
have an increase in sales this year than last year. Cost of sales is the purchase price of
what Akbar’s will need to pay in order to sell their products and service. For example
Akbar’s will need to pay for advertising so their customers are aware of the business
and they can know the offers which Akbar’s have. Akbar’s will also need to pay wages
out to their staff and the waiters and waitresses. Wages are a cost of sales this is
because Akbar’s will need to pay wages to their staff so their customers are getting their
food served to them at the tables and to take their orders. They also will need to pay the
chefs who work at Akbar’s because the chef have a major role in the business as Akbar’s
have customers coming to the restaurant to eat. Akbar’s will need to pay for the
ingredients for the food which they provide their customers at the restaurant. The
owners of Akbar will need to buy ingredients so they can serve food to their customers
so the business makes profit. Akbar’s will also need to pay for the building premises so
they can run their business and they can make profit by allowing their customers to sit
in and eat their food. Gas and electricity bills are another cost of sales or Akbar’s this is a
major cost because without gas and electricity at the restaurant, the restaurant will not
run. The gas will be used for making the food at the restaurant and electricity will need
to be used for the lighting, heaters and machines at the restaurant. The cost of sales is
on the profit and loss account so that Akbar’s know how much money they have spent
on the cost of their good in order to run the business. The profit and loss account shows
that Akbar’s had spent more money this year on the costs of sales then last year. The
figures had increased this year as last year the cost of sales was £1225 and this year it
was £1475. This helps Akbars to see whether they have made a loss or a profit on the
cost of sales.
Gross profit is a company’s profit before operating, interest payments and taxes; it’s a
company’s total revenue. For example the gross profit for Akbar’s is all the profit which
Akbar’s have made in total before giving out wages and taxes. Gross profit is on the
profit and loss account because Akbar’s can know how much money they have made.
Gross profit is on the profit and loss account so that Akbars can see whether they have
made a profit or a loss on the gross profit this year than last year. On the profit and los
account it shows made less gross profit than last years as the figures for this year was
£1375 and last year was £1450. The expenses are the economic cost that a business
incurs through its operations to earn revenue. The expenses that Akbar’s have are the
mortgage of the premises they use and they also have expenses of all the utilities and
machines which they buy in order to make and provide food for their customers.
Marketing is another expense this is because Akbar’s will need to advertise and
promote their business to customers and need to share the special offers that they have
for their customers at the restaurant. Repairs and maintenance is an expense at Akbar’s
because if the equipment, machines or lighting get damaged or stop working they will
need someone to come and repair it as it can affect the service of their business. Also
they will need someone to come and check their equipment and machines in order to
make sure they are working and they are maintained. The profit and loss account has
expenses as an element because it shows Akbar’s whether they have made a profit or
loss through expenses. For example on the profit and loss account the figures for this
year are £925 and this shows Akbars have made a profit as last year Akbar’s had made
£825. Net profit is the amount of money which is left after paying wages and taxes. The
net profit is calculated by subtracting a company's total expenses from the total
revenue. The reason why net profit is on a loss and profit account is to make sure
Akbar’s know how much profit is left after paying the taxes and wages out to the staff.
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