A year of bread on one page: All through 2025, Lena's three shops sold loaves at $3, cakes and lunches, and the Mill Lane bakehouse sold bread wholesale to cafés and hotels.
By 31 December the tills and the invoices added up to $1,600,000. Out went the flour from Valley Grain, the wages of 22 people, the rent, the interest on the bank loan and the tax.
So did the bakery make money? How much? And what happened to it? One page answers all three: the profit and loss account.
A profit and loss account is a summary of a business's trading over a period, usually a year. It shows the money earned from sales (sales revenue), the costs of earning it, and the profit or loss left at the end. It then shows where that profit went: interest to lenders, tax to the government, dividends to the owners, and the part the business keeps.
It has other names that mean the same thing: a statement of profit or loss, or an income statement.
Did the year make a profit?
- Sales revenue against every cost of the year
- Lena's Bakery Ltd: yes, a profit of $60,000 after tax
- A loss would show in brackets, as a negative
Where did the money go?
- Cost of sales: what the goods that were sold cost
- Expenses: wages, rent and the other running costs
- Interest to the bank and tax to the government
What happened to the profit?
- Dividends: the part paid to the shareholders
- Retained profit: the part the company keeps
- Lena's: $30,000 paid out and $30,000 kept
A period, not a day: Every profit and loss account names its period in the heading: 'for the year ended 31 December 2025'. It is the story of twelve months of trading.
$85,000 of profit in a year is a very different business from $85,000 in a month. A figure with no period tells you nothing.
At the end of each financial year a company prepares its final accounts. The profit and loss account is the one about performance: how the year went. The other, the balance sheet, is a snapshot of what the business owns and owes on the last day.
Lena's Bakery Ltd is a company (1.2.3), so the law requires it to keep these accounts. Lena and Marco also use the profit and loss account themselves, to see which year went well and to decide how much of the profit to pay out.
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Read a profit and loss account from the top. It starts with everything the business sold, then takes costs away in two steps. Each step leaves a profit with its own name.
| Line | Lena's Bakery Ltd, 2025 | What it is |
|---|---|---|
| Sales revenue | $1,600,000 | Everything sold in the year: loaves, cakes, lunches and wholesale bread (3.3.2) |
| Cost of sales | ($480,000) | What the goods that were sold cost: flour, butter, sugar, packaging, the direct costs of 3.3.1 |
| Gross profit | $1,120,000 | Sales revenue minus cost of sales |
| Expenses | ($1,035,000) | The running costs (overheads): wages and salaries $750,000, rent and utilities $180,000, other $105,000 |
| Profit before interest and tax | $85,000 | Gross profit minus expenses: what the trading itself earned |
Two subtractions: Gross profit = sales revenue − cost of sales
Profit before interest and tax = gross profit − expenses
Lena's: $1,600,000 − $480,000 = $1,120,000, then $1,120,000 − $1,035,000 = $85,000. A figure in brackets, like ($480,000), is one that is taken away.
The two profits answer different questions. Gross profit asks: does the bakery sell its bread for much more than the ingredients cost? At Lena's, yes: $1,120,000 of every $1,600,000 is left once the flour and butter are paid for.
Profit before interest and tax asks: once the shops, the bakehouse and the 22 people are paid for as well, is anything left? At Lena's, $85,000. The running costs take most of the gross profit, which is why a wage rise or a rent increase matters so much to a bakery.
Cost of sales counts only what was sold: Lena's started 2025 with $13,000 of flour and other ingredients in stock, bought $482,000 more during the year, and had $15,000 left on 31 December.
Cost of sales = opening stock + purchases − closing stock = $13,000 + $482,000 − $15,000 = $480,000.
The flour still in the store at the year end has not been turned into bread that was sold, so it is not a cost of this year's sales.
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Profit before interest and tax is what the trading earned. Three groups now take their share, always in the same order: the lender first, the government second, the owners last. What is left stays in the business.
From $85,000 to what the bakery keeps, 2025
Interest: $10,000
Paid to the bank on what is left of the Mill Lane loan. $85,000 − $10,000 = profit before tax of $75,000.
Tax: $15,000
Tax is charged on profit before tax: 20% of $75,000 = $15,000. $75,000 − $15,000 = profit for the period of $60,000, the profit that belongs to the shareholders.
Dividends: $30,000
Paid to the shareholders by shareholding: Lena $15,000, Marco $10,000, Marco's cousin $5,000.
Retained profit: $30,000
$60,000 − $30,000 = $30,000, kept in the company to spend on itself (3.2.1).
| Lena's Bakery Ltd: statement of profit or loss for the year ended 31 December 2025 | $ |
|---|---|
| Sales revenue | 1,600,000 |
| Cost of sales | (480,000) |
| Gross profit | 1,120,000 |
| Expenses | (1,035,000) |
| Profit before interest and tax | 85,000 |
| Interest | (10,000) |
| Profit before tax | 75,000 |
| Tax | (15,000) |
| Profit for the period | 60,000 |
| Dividends | (30,000) |
| Retained profit | 30,000 |
The whole statement in six lines: Sales revenue − cost of sales = gross profit
Gross profit − expenses = profit before interest and tax. Then − interest = profit before tax; − tax = profit for the period.
Profit for the period − dividends = retained profit.
Two variations use the same layout. A year that goes badly ends in a loss, written in brackets: a loss for the period of ($12,000) means costs beat revenue by $12,000, and there is no profit to pay out.
A charity or social enterprise has no shareholders to pay. Second Helpings, the food NGO, calls what is left at the bottom its surplus, and it has no dividends line.
You get the raw figures, not the lines: A question rarely hands you sales revenue. Constructing the statement means turning each raw figure into its line, showing the working, and putting the lines in the right order under a heading.
What it gives you instead
- A price and a number sold.
- A cost per unit.
- Expenses as a percentage of revenue.
- Tax as a percentage of profit.
- Dividends as a share of what is left.
Lena's Bakery Ltd plans to bake birthday cakes to order in 2026. Marco has put the forecast figures in a table.
| Forecast for birthday cakes, 2026 | Figure |
|---|---|
| Price per cake | $40 |
| Forecast sales | 2,000 cakes |
| Direct cost per cake (sponge, cream, decorations, box) | $14 |
| Expenses: a cake decorator's wages | $24,000 |
| Expenses: marketing | 10% of sales revenue |
| Interest | 7.5% of a $20,000 loan for decorating equipment |
| Tax | 20% of profit before tax |
| Dividends | 50% of profit for the period |
Line by line, with the working
Sales revenue: $80,000
Price × quantity = $40 × 2,000 = $80,000.
Cost of sales: $28,000
Direct cost per cake × quantity = $14 × 2,000 = $28,000. Gross profit = $80,000 − $28,000 = $52,000.
Expenses: $32,000
Wages $24,000 + marketing (10% × $80,000 = $8,000) = $32,000. Profit before interest and tax = $52,000 − $32,000 = $20,000.
Interest: $1,500
7.5% × $20,000 = $1,500. Profit before tax = $20,000 − $1,500 = $18,500.
Tax: $3,700
20% × $18,500 = $3,700. Profit for the period = $18,500 − $3,700 = $14,800.
Dividends: $7,400
50% × $14,800 = $7,400. Retained profit = $14,800 − $7,400 = $7,400.
Three slips that cost a line
- Tax on the wrong profit. Tax is a percentage of profit before tax, $18,500, not of gross profit or of profit before interest and tax.
- The wrong base for a percentage. Marketing is 10% of sales revenue; dividends are 50% of profit for the period. Read what each percentage is of.
- No heading, no working. Name the business and the period, put $ at the top, and show the multiplication behind every line you had to work out.
Working backwards to one line
- Profit before interest and tax = sales revenue − cost of sales − expenses. Lena's: $1,600,000 − $480,000 − $1,035,000 = $85,000.
- Tax rate = tax ÷ profit before tax × 100. Lena's: $15,000 ÷ $75,000 × 100 = 20%. Work out profit before tax first.
- Dividends paid = profit for the period − retained profit. Lena's: $60,000 − $30,000 = $30,000.
- A surplus is found the same way: add up all the revenue, then take away every cost, including interest.
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How this comes up: You get a table of figures. Then you are asked for the whole statement, or for one line of it.
The two kinds of question
- Construct a statement of profit or loss, showing all your working, for four marks. Sometimes it is a forecast for a new product, sometimes last year's actual figures.
- One line, in shorter parts for two marks each: the profit before interest and tax, the tax rate, the dividends paid, or a charity's surplus. Each wants the working and the $ or % sign.
The four-mark pattern
- Heading. The business, 'statement of profit or loss for the year ending …', and $ above the figures.
- Top half with working. Sales revenue (price × quantity), cost of sales in brackets, gross profit, expenses with their working, profit before interest and tax.
- Bottom half with working. Interest (keep the line even at $0), profit before tax, tax as a percentage of it, profit for the period.
- The owners' line, if the table has one. Dividends, then retained profit. No dividends in the table: stop at profit for the period.
The costly habit: Writing the right figures with none of the working. A perfect statement with no working cannot get full marks, however neat it is.
The working is short: one multiplication beside each line you had to calculate.
Using the table, construct a forecast statement of profit or loss for the lunch-box service for the year ending 31 December 2026 (show all your working).
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.