Last edited 01 Nov 2020

Profit and loss account

Contents

[edit] Introduction

Businesses will typically maintain a variety of financial statements to monitor performance over a set period. These include balance sheets, cash flow statements and profit and loss accounts. A profit and loss account will display the business’ income from sales, bank interest and any other income, goods to sell on to customers, or they may be more general administrative expense such as stationary. The expenses are subtracted from the sales to calculate how much profit (where income exceeds expenses) or loss (where expenses exceed income) a business is making.

A simple profit and loss account would display the income or turnover at the top with the expenses and costs beneath. The costs would usually be arranged into groups, rather than listed individually for ease. For example, rather than listing stamps, paper, pens, pencils, envelopes etc, it is appropriate to group them all under the title of stationary.

[edit] Legal requirement

By law, if a company is a limited company or a partnership whose members are limited companies, a profit and loss account must be submitted annually as part of the financial statement to Companies House.

Self-employed sole traders and most partnerships do not require a formal profit and loss account but accurate records are required in order to complete a self-assessment tax return.

[edit] Basic records

The exact profit and loss reporting requirements vary, but whatever business type, accurate records are required of income and expenditure. The basic records that should be kept include:

  • Records of all sales and takings.
  • Records of all purchases and expenses.
  • A list of petty cash expenditure (if relevant).
  • A record of goods taken for personal use and any payments to the business for these.
  • A record of any money taken out of the business for personal use or paid in from personal funds.
  • Back-up documents of all the above.

[edit] Information to be displayed

[edit] Business income

The income into a business comes under two main categories for profit and loss reporting:

[edit] Business expenditure

The three main categories for business expenditure are:

The cost of fixed assets is charged for as depreciation each year which reflects the fall in the value of the asset over time which spreads the cost of the asset over several years.

[edit] Example Profit and Loss Account

There are varying levels of complexity of profit and loss accounts depending on the size and type of business. A very simple example is displayed below.

£000s £000s
Turnover (or Revenue) Xxx
Cost of sales Xxx
Gross Profit xxx
Expenses Xxx
Operating profit Xxx
Depreciation Xxx
Interest Xxx
Profit before tax Xxx
Tax Xxx
Net Profit Xxx
Dividends Xxx
Retained Profit Xxx

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