• Trading and profit & loss accounts describe revenue, costs and profit over a period.
• They are closely linked and may be shown together.
• Accounts should clearly state the period covered.

5.1 Trading Account – Purpose

• Turnover = total sales of goods and/or services.
• Cost of sales = direct expenses incurred in providing the goods/services that generated revenue.
• Typical transport direct costs: drivers' wages, VED, vehicle insurance, fuel, tyres, maintenance and vehicle depreciation.
• Gross profit = turnover minus direct cost of sales.
• Gross profit represents profit from direct trading before overheads.

5.2 Profit & Loss Account – Purpose

• Start with gross profit transferred from the trading account.
• Deduct indirect expenses/overheads.
• Examples: directors' remuneration, office salaries, rent/rates, heat/light, bank charges, telephone/postage, audit/accountancy fees, insurance, building maintenance, printing/advertising, travel and entertainment.
• Net profit before tax = gross profit minus overheads.
• If total expenses exceed income, the result is a net loss.

5.3 Uses of Trading and Profit & Loss Accounts

• Compare actual performance with forecasts and previous years.
• Check whether turnover is reaching expected levels.
• Measure direct costs as a percentage of turnover.
• Assess gross profit in money terms and as a percentage of turnover.
• Assess overheads in money terms and as a percentage of turnover.
• Assess net profit before tax in money terms and as a percentage of turnover.
• Identify adverse trends such as low turnover or excessive direct/overhead costs.
• Shareholders can assess management effectiveness.
• Potential lenders can judge whether lending is sensible.
• HM Revenue and Customs can use accounts when assessing tax.

5.4 Limitations of Trading and Profit & Loss Accounts

• Information is historical and may be received months after the year end.
• Net profit alone does not show how efficiently assets have been used.
• A business can have a large profit but a poor return on a very large investment.
• Overall accounts can hide individual operations that are unprofitable.