Profit and loss account the basics

What is a profit and loss account? - a summary of business transactions for a

given period - normally 12 months. By deducting total expenditure from total
income, it shows the brea! even point whether your business made a profit
or loss at the end of that period.
Who should see it"
#wners
$hareholders
%otential
&' (evenue ) *ustoms - wor! out your tax bill.
Do you need a profit and loss account?
By law, if your business is a limited company or a partnership whose
members are limited companies + yes you must produce a profit and loss
account for each financial year.
$elf-employed sole traders and most partnerships don,t need to create a
formal profit and loss account
%rofit and loss accounts are handy if you are loo!ing to grow your business,
or need a loan or mortgage.
Keeping accurate records
-ou need to !eep self-employment records for five years and limited company
or partnership records for six years after the latest date your tax return is due.
.ccurate record !eeping has important benefits. /t"
helps you or your company avoid paying too much tax
provides bac!-up for claims for certain allowances
reduces the ris! of interest or penalties for late tax payments
helps you plan and budget for tax payments
gives you the information you need to manage your business and
ma!e it grow
enables you to report on your profit or loss easily and 0uic!ly when
re0uired
will improve your chances of getting a loan or mortgage
ma!es filling in your tax return easier and 0uic!er
helps reduce fees if you use an accountant - your annual accounts will
be far easier to produce
1he basic records you will need to !eep are"
a separate list for petty cash expenditure if relevant
a list of all your sales and other income
a record of goods ta!en for personal use and payments to the business
for these
a list of all your expenditure, including day-to-day expenses and
e0uipment
a record of money ta!en out for personal use or paid in from personal
funds - this applies to limited companies
bac!-up documents for all of the above
-ou will need the information above to create your profit and loss account.

Business income falls into two categories for profit and loss reporting"
sales or turnover
other income
Business sales or turnover
-our business, total sales of products and2or services in a trading year is
referred to as turnover. 1his is the starting point for your profit and loss
account.
&ow you record sales will vary according to your business type and si3e. -ou
may use a simple list or ledger in a boo!, a tailored spreadsheet, or a
computer software program. Whichever system you use, you need to ensure
that it is accurate and updated regularly. $ee our profit and loss template.
$ales records bac!-up
1he bac!-up records for your sales ledger fall into two categories, and will
vary according to your business type"
$ales documentation"
copies of sales invoices issued by you
rolls of till receipts
records of money you pay into the business when ta!ing goods out for
personal use
%roof of income relating to the above"
paying-in slips
ban!2building society statements and similar
/f you operate on a cash only basis you must !eep detailed records of your
income in your sales boo! or ledger and be able to relate these to your
expenditure, cash in hand and ban! statements.
Business income" other
.s well as reporting sales income, you need to report income to the business
from other sources, for example"
interest on business ban! accounts
sale of e0uipment you no longer need
rental income to the business
money you put into a limited company from personal funds
(ecording other income
(ecord e0uipment sales in your sales ledger, or on a separate
schedule of assets if you prefer.
4eep a record of any rental income, for example if you sub-let part of
your office to someone else.
By law you must !eep paying-in slips and2or ban! statements to account for
your additional business income. /deally, you should be able to cross-
reference this documentation to the above other income records.
Recording business expenditure
Business expenditure falls into three !ey areas for the purpose of reporting
your profit or loss. -ou can save yourself, or your accountant, time by
grouping your costs accordingly in your purchase list or ledger. 1he three
!ey areas are"
cost of sales - the base cost of obtaining or creating your product
business expenses
cost of e0uipment you have bought or leased for long-term use
Business expenditure back-up
1he bac!-up records for your business expenditure fall into two categories. .s
with sales records, they will vary according to your business type.
1. %urchase2expenditure documentation
copies of supplier invoices2receipts issued to you
till receipts for items bought over the counter
payroll and 5ational /nsurance records if you have employees
2. %roof of expenditure relating to the above
che0ue boo! stubs
ban! statements
credit card statements and receipts
/t is important for you to be able to cross-reference your records to your
expenditure figures if as!ed. /f you mislay a receipt for a small item, ma!e
sure you enter it in your purchase or petty cash boo! ledger and ma!e a note
that you have lost the receipt.
Cost of sales
1he cost of sales is the base cost of obtaining or creating your product.
1his might include"
the cost of stoc! you buy for resale
components2raw materials to ma!e your product
labour to produce the product
machine hire
small tools
other production costs
When you create your profit and loss account, you deduct your cost of sales
from your overall sales, or turnover, to arrive at your gross profit. 1his is your
profit before deduction of expenses.
*ost of sales does not usually apply if you supply a service only.
Business expenses
1hese are all the ongoing expenses associated with running your business
that you can deduct from your gross profit figure on your profit and loss
account to calculate a figure of profit before taxation.
6egitimate business expenses for accounting purposes are"
employee costs
premises costs
repairs
general administration
motor expenses
travel2subsistence
advertising2promotion2entertainment
interest
bad debts
legal2professional costs
other finance charges
depreciation or loss - profit - on sales of e0uipment
any other expenses
5ote that some elements of these expenses are not allowed for tax purposes
and are added bac! before your taxable profit is calculated.
.pportioning expenses - self-employment and partnerships
Where expenses apply partly to business and partly to non-business or
personal use, on your tax return you need to record the whole expense, then
separately record the amount that relates to non-business use.
When filing invoices, remember to note any apportionment on them.
Euip!ent Cost
.ny items of e0uipment you have bought or leased for long-term use are
called capital items or fixed assets. 1hese might include"
furniture
computer e0uipment
cars or vans necessary for the business
machinery
premises
*apital items cannot be deducted from your taxable profits in the same way
that expenses can. But you still need to !eep accurate records because you
can spread the costs over several accounting years in your profit and loss
account. -ou may also be able to claim allowances against your net profit for
a percentage of the cost of the item.
"hen?
$elf-employed and partnership accounts should ideally be made to 71 'arch
or 8 .pril, although different accounting periods can be used in certain
circumstances.
/f you !eep to the dates above you may need to produce accounts for a part-
year to start with. But it will save you time in the long run.
6imited companies can ma!e their accounts up to any date. 1he accounting
period is also referred to as the company,s financial year. . normal accounting
period will be 12 months, but sometimes it can be shorter - for example where
a company started business in the middle of the year, but wants its financial
year to end on 9ecember 71.