• Income statement 2 shows a business’s total expenses for a trading period (usually a year) and the net profit or net loss that is made when these expenses have been deducted.
• If the gross profit is greater than the expenses, the business made a net profit. • If the gross profit is less than the expenses, the business made a net loss. • Expenses is the total amount it has cost a business to sell a product or service during a trading period.
• Carriage outwards is the cost of getting goods from the business to customers (i.e. shipping and handling costs).
• Bad debts is an expense resulting from non-payment by debtors.
• When an individual or business is made bankrupt, they have been legally declared to be unable to pay their debts.
• Depreciation is an expense resulting from the reduction in value of fixed assets over time. • Net profit is the profit made by a business after expenses are deducted. • It is important for a business to check a customer’s credit status when selling goods. • The straight line method calculates depreciation based on the cost price of the fixed asset. • The reducing balance method calculates depreciation based on the value of the fixed asset each year. • Summary of calculations:
Net profit/loss = gross profit/loss – expenses Straight line depreciation = cost price of fixed asset × depreciation rate ÷ 100
Reducing balance depreciation = net book value of fixed asset at start of year × depreciation rate ÷ 100
Taking stock A
Go to page 186 of your Activities and Accounts Book to check what you have learned in chapter 26.
