IBBusinessDPBusiness ManagementHLRevision Notes3. Finance & Accounts3.4 Final AccountsStatement of Profit or Loss

Statement of Profit or Loss (DP IB Business Management)

Revision Note

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Lisa Eades

Expertise

Business Content Creator

An Introduction to Financial Accounts

  • Financial accounts detail the financial performance of a business over a trading period

  • The two main financial accounts are

    • The Statement of Profit or Loss

    • The Statement of Financial Position

  • Public Limited Companies (PLCs) have to produce financial reports annually

    • Annual reports must comply with International Financial Reporting Standards (IFRS) allowing straightforward comparisons of performance over time and between companies

Exam Tip

The two main financial accounts sometimes go by different titles, though the titles given above are those that will be given in your examination.

  • The Statement of Profit or Loss is also widely known as the Profit and Loss Account or an Income Statement

  • The Statement of Financial Position is often referred to as the Balance Sheet.

The Statement of Profit or Loss

  • The Statement of Profit or Loss shows the income and expenditure of a business over a period of time - usually a year - and calculates the amount of profit made 

  • It is divided into three parts

    • The trading account

    • The profit and loss account

    • The appropriation account

Diagram: the statement of profit or loss

The statement of profit or loss has three sections 1. The trading account 2. The profit and loss account 3. The appropriations account
An example of a Statement of Profit or Loss for Head to Toe Wellbeing Ltd

The trading account

  • The trading account is where the cost of sales is deducted from sales revenue to calculate the gross profit

    • In 2022 Head to Toe Wellbeing Limited's sales revenue was $124.65m and its cost of sales were $18.92m

    • The gross profit for the period was therefore 

$ 124.65 straight m space minus space $ 18.92 straight m space equals space $ 105.73 straight m

The profit & loss account

  • The profit and loss account deducts a series of expenses to determine the profit for the period 

    • In 2022 gross profit was $105.73m and expenses were $39.87m

    • The profit before interest and tax was therefore 

    $ 105.73 straight m space minus space $ 39.87 straight m space equals space $ 65.86 straight m

    • The business also paid $2.01m interest

    • The profit before tax was therefore

    $ 65.86 straight m space minus space $ 2.01 straight m space equals space $ 63.85 straight m

    • The business also paid $5.47m tax

    • The profit for the period was therefore

    $ 63.85 straight m space minus space $ 5.47 straight m space equals space $ 58.38 straight m

The appropriations account

  • The appropriations account shows how profits are distributed for the period

    • In 2022 Head to Toe Wellbeing Limited distributed $13.75m to shareholders as dividends

    • $44.63m was therefore retained as profit

Exam Tip

For non-profit organisations some amendments are made to the standard layout of the Statement of Profit or Loss

  1. The word 'profit' is replaced by 'surplus'

  2. Non-profit organisations are usually exempted from the payment of corporation tax so this is not normally recorded or is recorded as a 0 value

How Stakeholders use the Profit & Loss Account

  • The Statement of Profit or Loss is a very useful source of information for stakeholders to evaluate the performance of a business

How Stakeholders use The Statement of Profit or Loss

Shareholders

Employees

  • Shareholders are interested in revenues, costs and profits earned, business growth and dividend payments

  • Shareholders may use ratio analysis tools to identify profit margins and returns on investment

  • Employees are interested in profits earned and the potential for wage increases and job stability

  • Employees may look at notes to the accounts that detail levels of executive pay

Managers & Directors

Suppliers

  • Managers are interested in key performance data such as an improvement in sales revenue and net profit

    • This data can aid business decision making

    • Financial data can provide evidence to support the payment of bonuses

  • Suppliers are interested in the continued success of the company the are supplying and this information is also used by suppliers to determine the level of trade credit offered to businesses

Government

Local Community

  • Governments need to determine how much tax is payable

  • The Statement of Profit or Loss can provide an insight into whether the business will continue to provide employment, place orders with other businesses and supply goods and services to the public sector

  • The local community is interested in the stability of the business and what this may mean for jobs in the community

  • Another interest is to see if the firm is generating enough profit to perhaps approach them for local sponsorship

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Lisa Eades

Author: Lisa Eades

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.