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Hi Pippa,
I am not sure if this will help but here goes…
If you think of a ‘normal’ TP&L account the gross profit is calculated in the ‘top half’ of the account and the net profit in the bottom half as follows:
Sales 10000
Less cost of sales
Opening Stock 3000
Purchases 5000
Cost of Sales 8000
The cost of sales is deducted from sales to give the Gross Profit 2000
(In the ‘bottom half’ of the account you list overhead expenses such as rent, utilities etc.)
Less Expenses
Rent 30
Utilities 20
Wages 10
Total Expenses 60
And deduct the expenses from the Gross Profit to give the Net Profit 1940
The bar trading account is similar to the TP&L account – it deducts costs from the amount of sales the bar has made so that the amount of profit or loss can be calculated. As you know, the bar in this case belongs to an otherwise not-for-profit organisation that probably does aim to make a profit from the bar. It may use the money to help with the running costs of the organisation so that it does not have to raise so much money from members in subscriptions. Or it may decide to donate some of the profits to another charity, etc. In any case the organisation probably does want to make a profit and needs to know how much it has raised.
As you also know, the amount of profit does not change the only difference is in how the account is laid out:
Without wages the account may look as follows:
Bar Sales 10000
Less cost of sales
Opening Stock 3000
Purchases 5000
Cost of Sales 8000
The cost of sales is deducted from sales to give the Gross Profit 2000
However, if the organisation has paid wages to staff this will also have to be deducted from the profit. Say they have paid £500 then the profit will be reduced to £1500. The only difference is whether the wages are included in the equivalent of the top half of the account and counted as part of the cost of sale, or included in the bottom half as an overhead expense.
It if is in the ‘top half’ then it is accounted for as follows:
Bar Sales 10000
Less cost of sales
Opening Stock 3000
Purchases 5000
Cost of good sold 8000
ADD wages 500
Cost of Sales 8500
Then deduct the cost of sales sales to give the Gross Profit 1500
In the other method the wages are accounted for as an overhead expense – the equivalent of the ‘bottom half’ of a TP&L account:
Bar Sales 10000
Less cost of sales
Opening Stock 3000
Purchases 5000
Cost of Sales 8000
Gross profit 2000
THEN deduct wages 500
Then calculate the NET profit 1500
I hope this is helpful.
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