The SPL shows how much money a company makes (or loses) over a period. Think of it as a financial diary that records every dollar earned and spent.
Revenue is the total money earned from selling goods or services.
Analogy: If you run a lemonade stand, every cup sold adds to your revenue.
Formula: Revenue = Price × Quantity Sold
COGS is the direct cost of producing the goods sold.
Example: For lemonade, COGS includes lemons, sugar, cups, and water.
Formula: COGS = Direct Materials + Direct Labour + Production Overheads
Gross profit is what remains after subtracting COGS from revenue.
Formula: \$Gross\ Profit = Revenue - Cost\ of\ Sales\$
Analogy: It’s the money left after paying for the ingredients.
Expenses are all other costs that help run the business.
Analogy: Think of these as the “running costs” of your lemonade stand.
Operating profit shows the profit from core business activities.
Formula: \$Operating\ Profit = Gross\ Profit - Expenses\$
Analogy: It’s the profit you keep after covering all running costs.
Taxation is the amount the company must pay to the government.
Formula: Tax = Tax Rate × Operating Profit
Analogy: It’s like paying a “service fee” for using the city’s roads.
Net profit is the final profit after all expenses and taxes.
Formula: \$Net\ Profit = Operating\ Profit - Tax\$
Analogy: It’s the money you can actually keep or reinvest.
Dividends are the portion of profit paid to shareholders.
Retained earnings are the profit kept in the company for future growth.
Formula: Retained Earnings = Net Profit - Dividends
Analogy: Think of dividends as sharing your lemonade profits with friends, and retained earnings as saving some for a bigger stand.
| Item | Amount (£) |
|---|---|
| Revenue | 50,000 |
| Cost of Sales | 20,000 |
| Gross Profit | 30,000 |
| Operating Expenses | 12,000 |
| Operating Profit | 18,000 |
| Tax (20%) | 3,600 |
| Net Profit | 14,400 |
| Dividends | 4,000 |
| Retained Earnings | 10,400 |