• A business needs to keep track of all their income - REVENUE and EXPENSES.

• Any money coming in to a business is recorded as revenue.

• Any money going out of a business is known as an expense.

• For a business to be profitable their revenue must be greater than their expenses.

• Businesses will generate a profit and loss statement to calculate their annual profitability.

Revenue (income)

• Sales – money from the sales of good s they trade in – i.e. music shop CD’s

• Fees – money received from work done for a client – also known as services rendered.

• Commissions earned – money received from a client based on the value of the service.

• Interest received – from financial institutions.• Dividends• Rent

Expenses (costs)

• Wages –paid to employees• Rent – paid for the use of a business premise• Insurance – premiums paid to insurance

companies• Rates and taxes – government and local

government charges• Advertising and promotion • Depreciation – the loss in value of assets that

occurs over time (computers)

• A capital item is not included in a profit or loss statement.

• These are things such as a vehicle or a building. They don’t directly bring revenue into a company like selling an item or providing a service.

Prepare a profit and loss statement for Jenny’s Jam Shop for June 30. The following revenue and expenses were recorded – Sales $546,000, Interest Paid $3560, Wages $297,800, Advertising $5890, Rent $3400, Telephone $3789, Insurance $5500, Water Rates $3900, Interest received $560.

Cost Of Goods Sold

• The profit and loss statements that we just looked at are rather simplified.

• They do not take into account the cost of the items on the shelves of the shops.

• A business has to buy the goods – an expense and then this needs to be taken away from any income.

• There is a procedure that you need to follow.

• To calculate the cost of goods sold, a business counts its stock at the beginning and the end of the year (stock take sale).

• These figures – plus the value of the goods purchased during the year are used to calculate the C.O.G.S.

A shop has stock valued at $220,000 at the start of the year. During the year they purchase $278,000 worth of goods. When the shop did a stock take at the end of the year the stock was valued at $189,000. Calculate the cost of goods sold during that year.

Gross Profit and Net Profit

• To just calculate the COGS is not realistic for a business – it needs to be incorporated within a profit and loss statement.

• Gross Profit is the difference between sales and the COGS – the profit a company makes on selling its goods.

• Net Profit is the profit margin once all other costs have been taken out.

Make up a profit and loss statement for Fred’s Shop has the following expenses and revenue for the year ended June 30: wages $98500, Sales $885,000, rent $22500, rates and taxes $2400, insurance $6675, opening stock $138000, electricity $1900, purchase of stock $99200, depreciation $3480, telephone $1235, advertising $4445, closing stock $116590, interest paid $568.

Fred’s Shop Profit and Loss StatementYear ended June 30

Sales $885,000Less – cost of goods soldOpening Stock $138,000Plus – purchases $ 99,200Goods available for sale $237,200Less – closing stock ($116,590)

$120,610 ($120,610)Gross Profit $764,390

Less – expensesWages $98,500Rent $22,500Insurance $6675Rates and Taxes $2400Electricity $1900Telephone $1235Depreciation $3480Advertising $4445Interest Paid $568

$141,703 ($141,703)Net Profit $622,687