What is a profit and loss account UK?

______In short, a profit and loss statement sets out the itemised details of sales and purchases that have been made by your business. It subtracts the total outgoings from the tot

What is a profit and loss account UK?

______

In short, a profit and loss statement sets out the itemised details of sales and purchases that have been made by your business. It subtracts the total outgoings from the total income, to show you how much profit (or loss) you have made over a specific period of time. Its often referred to as the P&L.

Why is a profit and loss statement useful?

Unlike a balance sheet, which shows a snapshot of your current financial situation at a point in time, a profit and loss statement shows how your company has performed over a specific period  a month, a quarter or a year.

Its one of the most important financial documents youll need for running and growing a successful business. It lets you stay compliant  it helps you to submit accurate accounts at the end of the trading year  and it lets you understand the impact of purchases and sales on trading. In turn, this lets you expand your business, attract more investment, or recruit new members of staff to your team.

Does every business need a profit and loss statement?

If youre running a limited company, then youre obliged to produce a profit and loss statement every financial year. Your accountant will need the information to calculate your tax liabilities. Even if youre working as a limited partnership, however, or as a sole trader, a P&L is still useful. As most P&Ls are produced in a standard format, it enables investors and suppliers to understand how your business is performing.

How do you create a P&L?

Most accountancy software has this function built-in. You can pull off a report detailing your P&L whenever you need the information. But it is still useful to understand the underlying approach to creating the final figure, be it positive or negative. The simplest formula is this one: total revenue  total expenses = profit (or loss).

Details of your turnover form the basis of the P&L calculations. Thats the money earned from selling goods or services during a trading year. You will need to use:

  • sales receipts
  • sales invoices
  • credit notes and other sales documentation

Under normal accounting rules, sales and expenses are included in profit when they happen, not when they are actually paid. This means that profits include all credit sales and purchases made within the period, even if they havent been paid yet.

Gross profit is calculated by taking the sum of direct costs, things like materials and labour, and indirect costs away from sales made  usually over a 12-month period. Indirect costs are also known as overheads. You can see what your businesss gross profit margin is by dividing the gross profit by turnover, and the net profit margin by dividing its net profit by its turnover. This clarifies how much profit youre making, overall.

In summary

The P&L is essential for calculating tax liabilities accurately, but also useful to help you compare the profit margins being made from one period to another.

For example, if the profit margins go up from one year to the next, this means that more of the income from sales is staying in the business  perhaps because youre working more efficiently, putting up prices, or finding savings in your processes. Having a P&L to hand, on a monthly basis, helps you to focus on effective resourcing and the impact of purchases and sales on the overall health of your business.

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