What Is a Profit and Loss Account?
And how is a profit and loss sheet unlike a balance sheet? Is4profit takes a look...
A profit and loss account details your business transactions, subtracting the total outgoings from the total income to tell you how much, if any, profit you have made.
Your profit and loss sheet, unlike a balance sheet, displays the financial health of your company for a period of time – a month, a quarter or a year. A balance sheet only represents your finances at a particular moment in time.
If your company is incorporated, you are required by law to produce a profit and loss sheet for each financial year. If your business is not trading as a limited company you don’t have to produce one, but producing a profit and loss statement is nevertheless useful to determine how your business is performing at a glance.
What goes into your P&L account?
1. Gross income (the total of all money that comes in from your sales to customers, assuming you are not VAT-registered), and takes away any discounts or allowances (for example, for early payment or bulk purchases), giving you net income.
2. Cost of sales. From your net income, the P&L takes away cost of sales (for example, total unit costs, packaging and delivery), giving you your gross profit.
3. Overheads (sometimes called fixed costs). Overheads include rent for your premises, wages, telephone and broadband contracts etc. The resulting figure is your operating profit.
4. Other income (for example, from machinery sales, rent from tenants in your office space etc) then gets added in to give you your profit before tax.
5. Tax. Finally, take the tax away from your profit before tax and you have your final net profit or loss figure.