Profit and Loss Accounts

How profit & loss accounts help you manage your business

You might not need an accounting qualification to be successful in business but understanding accounts will help you understand the basics of financial management and feel comfortable using standard financial tools and measures to monitor the performance of your business.

This article gives an overview of a profit and loss account.  The other financial management accounts you need to understand and monitor are:

• The balance sheet 
• Your cash flow 

An annual profit and loss account, together with an annual balance sheet, form part of the annual statutory management accounts required by Companies House for Limited companies.

For a closer look at profit and loss accounts see How to create a profit and loss account

What is a profit and loss account

An annual profit and loss account records annual sales income, costs and expenses and shows business performance over a specific period of time.  Profit and loss accounts:

• shows business performance over a specific period of time
• records incomings (revenue from sales) and outgoings (cost of sales plus overheads and expenses) to show whether a profit or loss has been made
• shows a summary of invoices that have been raised, or sales income that has been generated, including an estimate of work in progress but not yet invoiced
• includes purchases made from suppliers for goods or raw materials, and an estimate of cost for goods/raw materials used but not yet paid for

One of the important things to remember about a profit and loss account is that it does not record whether invoices raised or received have been paid so it therefore does not indicate the amount of cash your business has (this is what a cash flow forecast is for).

Creating a profit and loss account

The figures in a profit and loss account will come from a number of different sources all over your business, so take advice from the outset on how best to lay out and categorise your day to day receipts and expenses.

There is some flexibility and judgement in calculating a profit and loss account, such as how long fixed assets should be depreciated over, and what adjustments you should make to cater for bad debts.  There is also flexibility over the profit and loss account format that you use.  A qualified accountant will advise you what is reasonable and acceptable.

For more information see How to create a profit and loss account

What a typical profit and loss sheet looks like:

A profit and loss sheet will usually look something like this:

Income	£ 50,000
less discounts and allowances	(5,000)
Net income	=45,000
Less direct costs (cost of sales)	(20,000)
Gross profit	=25,000
Less indirect costs (fixed overheads)	(7,000)
Operating profit	=18,000
Plus other income	2,000
Less other expenses	(1,000)
Profit before tax	19,000
Less tax	(8,000)
Net profit (or net loss)	=11,000

Where can I get a profit and loss template? 

Free profit and loss templates are available from the Microsoft Office Online website.

 

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