Profit & Loss, Budgets — GCSE Business Revision
Revise Profit & Loss, Budgets for GCSE Business. Step-by-step explanation, worked examples, common mistakes and exam-style practice aligned to AQA, Edexcel and OCR.
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Go to Sources of Finance (GCSE Business)What is Profit & Loss, Budgets?
A profit and loss account (or income statement) is a financial statement that summarises the revenues, costs, and expenses incurred during a specific period, showing the final profit or loss. Budgets are financial plans that set targets for future revenue and expenditure, used to control and monitor performance.
Board notes: Covered by all major boards (AQA, Edexcel, OCR). Students need to be able to calculate gross and net profit from given data and understand the structure of a simple profit and loss account. The concept of budgeting and variance analysis is also key.
Step-by-step explanationWorked example
A shop has revenue of £50,000. The cost of the goods it sold was £20,000, so its gross profit is £30,000. It then has other expenses like rent and wages totalling £25,000. Its net profit is £30,000 - £25,000 = £5,000. The business had budgeted for a net profit of £4,000, so it has achieved a favourable variance.
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Common mistakes
- 1Confusing gross profit and net profit. Gross profit is Revenue - Cost of Sales. Net profit is what is left after all other operating expenses (like rent and salaries) are deducted from the gross profit.
- 2Thinking a budget is a fixed document. Budgets are planning tools and may need to be adjusted (flexed) during the year if circumstances, such as sales volumes, change significantly.
- 3Misinterpreting a loss. Making a loss in a particular year, especially for a new business, is not necessarily a sign of failure. It becomes a problem if the business consistently makes losses and has no plan to return to profitability.
Profit & Loss, Budgets exam questions
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Step-by-step method
Step-by-step explanation
4 steps · Worked method for Profit & Loss, Budgets
Core concept
A profit and loss account (or income statement) is a financial statement that summarises the revenues, costs, and expenses incurred during a specific period, showing the final profit or loss. Budgets …
Frequently asked questions
What is the difference between gross and net profit?
Gross profit is the profit a business makes from selling its products, before deducting its overheads and other expenses. Net profit is the final profit remaining after all business costs have been paid.
What is a budget variance?
A budget variance is the difference between the budgeted or planned figure and the actual figure. A favourable variance is better than expected (e.g., higher revenue), while an adverse variance is worse than expected (e.g., higher costs).