Statement of Profit or Loss (Cambridge International AS Accounting)
Statements of profit or loss for limited companies
What is the layout of the statement of profit or loss of a limited company?
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The statement of profit or loss for a limited company is prepared in the **same way **it is prepared for that of a sole trader or a partnership business
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It is prepared** annually**
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It is the first of the three financial statements that must be prepared for limited companies
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Differences include:
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Debenture interest are included as part of finance costs
- These appear after the profit from operations
- The finance costs are subtracted to give the profit before tax
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Tax is included and is then subtracted from the profit before tax
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Expenses for a limited company are usually grouped by function
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Cost of sales
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Distribution costs
- Including delivery costs to customers, drivers' wages, warehouse costs, etc.
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Administrative expenses
- Including other expenses such as office costs, heat and light, etc.
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Finance costs
- Including debenture interest, loan interest, etc.
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Dividends for ordinary shareholders do not appear on the statement of profit or loss
Layout of a statement of profit or loss for a limited company
Worked Example The trial balance of Abrakadabra Limited at 31 March 2024 was as follows:
Abrakadabra Limited
Trial Balance at 31 March 2024Debit
$**Credit
$Revenue 166 000 Inventory at 1 April 2023 6 820 Purchases 65 900 Distribution costs 10 280 Administrative expenses 35 450 Fittings at cost 250 000 Provision for depreciation of fittings 75 000 Trade receivables 14 400 Bank 14 965 Trade payables 8 415 4% Debenture (repayable in 10 years) 46 000 Share capital 80 000 Retained earnings 28 000 Dividends paid on ordinary shares 5 600 403 415 403 415 Additional information:
- Inventory at 31 March 2024 was valued at $7 080
- Depreciation on fittings is to be charged at 20% method per annum using the reducing balance Depreciation should be allocated: administrative expenses 60%; distribution costs 40%
- Distribution costs include a rent payment of $2 700 for the 3 months from 1 March 2024 to 31 May 2024
- Administrative expenses include accrued wages of $4 550
- No debenture interest has been paid for the year ended 31 March 2024
- Tax for the year is estimated to be $3 700
Prepare the statement of profit or loss for Abrakadabra Limited for the year ended 31 March 2024.
Answer:
- Identify which balances affect the statement of profit or loss
Abrakadabra Limited
Trial Balance at 31 March 2024Debit
$Credit
**$Statement of profit or loss? Revenue 166 000 SoPoL Inventory at 1 April 2023 6 820 SoPoL Purchases 65 900 SoPoL Distribution costs 10 280 SoPoL Administrative expenses 35 450 SoPoL Fittings at cost 250 000 Provision for depreciation of fittings 75 000 Trade receivables 14 400 Bank 14 965 Trade payables 8 415 4% Debenture (repayable in 10 years) 46 000 Share capital 80 000 Retained earnings 28 000 Dividends paid on ordinary shares 5 600 403 415 403 415 Deal with the additional notes and identify how they affect the statement of profit or loss
Item 1 - Calculate the cost of sales
$6 820 + $65 900 - $7 080 = $65 640
Item 2 - Find the year's depreciation charge
- Find the current net book value
$250 000 - $75 000 = $175 000
- Multiply the net book value by 20%
20% × $175 000 = $35 000
- Find the allocations to the different functions
Administrative expenses: 60% × $35 000 = $21 000
Distribution costs: 40% × $35 000 = $14 000
- Add the depreciation charge to the relevant expenses
Administrative expenses: $35 450 + $21 000 = $56 450
Distribution costs: $10 280 + $14 000 = $24 280
Item 3 - Subtract the prepaid rent from the balance
- Find the cost per month
$2 700 ÷ 3 = $900
- Multiply this by two for the prepaid months (April & May)
$900 × 2 = $1 800
- Subtract this from the balance for the distribution costs
$24 280 - $1 800 = $22 480
Item 4 - Add the accrued wages to the balance for administrative expenses
$56 450 + $4 550 = $61 000
Item 5- Calculate the debenture interest
4% × $46 000 = $1 840
Item 6- Subtract the tax from the profit before tax
Final answer: Abrakadabra Limited
Final answer: Statement of Profit or Loss for the year ended 31 March 2024Final answer: $ Final answer: Revenue Final answer: 166 000 Final answer: Cost of sales Final answer: 65 640 Final answer: Gross profit Final answer: 100 360 Final answer: Distribution costs Final answer: (22 480) Final answer: Administrative expenses Final answer: (61 000) Final answer: Profit from operations Final answer: 16 880 Final answer: Finance costs Final answer: 1 840 Final answer: Profit before tax Final answer: 15 040 Final answer: Tax Final answer: (3 700) Final answer: Profit for the year Final answer: 11 340
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