The main purposes are:

• To calculate the net profit or net loss of the business
• To show all expenses incurred during the trading period
• To help owners know how much profit they earned after covering all expenses

Profit and Loss Account
for the year ended _________________

| Details          | Amount (TSh) | Details        | Amount (TSh) |
|------------------|--------------|----------------|--------------|
| Expenses:        |              | Gross Profit   |              |
| - Stationery     |              | (from Trading)|              |
| - Water bill     |              |                |              |
| - Electricity    |              |                |              |
| - Wages          |              |                |              |
| - General exp.   |              |                |              |
| Net Profit       |              |                |              |
| **Total**        | **XXX**      | **Total**      | **XXX**      |

Key rule: Total on the debit side must equal total on the credit side.

1. Start with Gross Profit — Begin with the gross profit figure brought down from the Trading Account
2. List all expenses — Write each expense (such as rent, electricity, wages, stationery) on the debit side
3. Calculate total expenses — Add up all expenses
4. Calculate Net Profit — Use the formula:

$Net\ Profit = Gross\ Profit - Total\ Expenses$

If expenses are greater than gross profit, the result is a Net Loss.

Mwanajuma operates a small shop in Dodoma. From her Trading Account, she had a Gross Profit of TSh 450,000 for the year ended 31 December 2023. The following expenses were incurred:

• Stationery: TSh 90,000
• Water bill: TSh 75,000
• Electricity: TSh 50,000
• Wages: TSh 28,000
• General expenses: TSh 55,000

Prepare Mwanajuma's Income Statement.

Solution

Profit and Loss Account
for the year ended 31 December 2023

| Details          | Amount (TSh) | Details        | Amount (TSh) |
|------------------|--------------|----------------|--------------|
| Stationery       | 90,000       | Gross Profit   | 450,000      |
| Water bill       | 75,000       |                |              |
| Electricity      | 50,000       |                |              |
| Wages            | 28,000       |                |              |
| General exp.     | 55,000       |                |              |
| Net Profit       | 152,000      |                |              |
| **Total**        | **450,000**  | **Total**      | **450,000**  |

Verification:

• Total Expenses = 90,000 + 75,000 + 50,000 + 28,000 + 55,000 = TSh 298,000
• Net Profit = Gross Profit - Total Expenses = 450,000 - 298,000 = TSh 152,000

• The income statement is prepared after the trading account
• Gross profit is the starting point
• All business expenses are recorded on the debit side
• Net profit = Gross profit - Total expenses
• If expenses exceed gross profit, the result is a net loss

• Rent and rates — payment for using premises
• Electricity and water — utility bills
• Wages and salaries — payment to employees
• Stationery — office supplies
• Insurance — business protection costs
• Telephone and internet — communication costs
• Advertising — promotion expenses
• Travel expenses — business travel costs

A Form 1 student in Tanzania whose parent runs a small duka or restaurant can use this knowledge to help them record daily expenses and calculate whether the business made a profit or loss at the end of the month. For example, if a mama's chip shop in Mwanza had sales of TSh 600,000 and spent TSh 380,000 on ingredients, the student could prepare a simple income statement showing a gross profit of TSh 220,000, then subtract other expenses like rent and charcoal to find the actual net profit.