Expenses and net profit

Overview

Expenses and net profit with worked figures, net losses, drawings, depreciation, loan interest, and ways to raise net profit without higher sales.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What are expenses in an income statement?

   Model answer

   Expenses are the indirect costs of running a business, also called overheads. Rent, insurance, administrative salaries and advertising are examples.

2. 2

   What is net profit?

   Model answer

   Net profit is gross profit minus expenses. Net profit is what the owner earns from the year's trading.

3. 3

   An accountancy practice has gross profit of £108,000 and expenses of rent £18,000, salaries £42,000, insurance £3,500 and marketing £6,500. What is its net profit?

   Model answer

   The net profit is £38,000. The working is £18,000 + £42,000 + £3,500 + £6,500 = £70,000, then £108,000 − £70,000 = £38,000.

4. 4

   A sole trader has revenue of £240,000, cost of sales of £96,000 and expenses of £88,000. Calculate gross profit and net profit.

   Model answer

   The gross profit is £144,000 and the net profit £56,000. The working is £240,000 − £96,000 = £144,000, then £144,000 − £88,000 = £56,000.

5. 5

   What is a net loss?

   Model answer

   A net loss arises when expenses are greater than gross profit. A loss reduces the owner's capital in the business.

6. 6

   A Portadown estate agency has gross profit of £45,000 and expenses of £51,200. What is its result for the year?

   Model answer

   The agency made a net loss of £6,200. The working is £45,000 − £51,200 = −£6,200.

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