- (1) Initial Inventory + Purchases
- - Final Inventory = Cost of Goods Sold
- (2) Sales - Cost of Goods Sold = Gross Trading Profit
The rest of the statement is covered by the following equation:
- (3) Gross Trading Profit
- - (Selling Expenses
- + General Administrative Expenses
- + Financial Management Expense
- - Financial Management Income)
- ± (Non-operating Income - Non-operating Expense)
- = Net Profit
The Disposition of the Net Profit.—The net profit for the period belongs to the proprietor and constitutes an increase in his proprietorship or investment, unless he has already drawn out some of these profits as they accrued. In this case, his drawings must be subtracted from the net profit indicated before showing the increment to his net worth. Accordingly, a final section of the profit and loss statement may give the disposition of the net profit and its appropriation or addition to the previous net worth or proprietorship item. This section, when used, is known as the appropriation section. If the business is a partnership, this section should show in detail the distribution of net profit among the several partners according to the agreement among them as to the proportions in which they are to share gains or losses. If a corporation, it should give the disposition made of the net profit in the way of dividends to the stockholders, and any other appropriation made of these profits, including transfer to surplus.
Two illustrations—one very simple, the other more complex—typical of profit and loss summaries are given for the guidance of the student.
Illustration 1
Aaron Conners
Statement of Profit and Loss For the year ending June 30, 1922
| Sales for the year | $28,465.20 | ||
| Goods on Hand July 1, 1921 | $ 8,500.00 | ||
| Purchases during the year | 22,362.50 | $30,862.50 | |
| Goods on Hand June 30, 1922 | 10,260.00 | ||
| Cost of Goods Sold | 20,602.50 | ||
| Gross Trading Profit | $ 7,862.70 | ||
| Clerk Hire | $3,050.50 | ||
| General Expenses | $2,405.45 | ||
| Depreciation | 52.50 | 2,457.95 | 5,508.45 |
| Net Profit for the year | $2,354.25 |
Illustration 2
Kimball and Morey
Statement of Profit and Loss For the Year Ending June 30, 19—