All companies require an accounting Profit and loss statement or Income statement for their accounts. There are several reasons why you need the report including:
- If registered at Companies House annual accounts are submitted. The reports are normally prepared by an accountant.
- If you are self-employed, the figures from the Profit and Loss Statement are required to complete your self-assessment return.
- The report may also be required by management monthly or weekly to assist in financial business decisions.
The other main accounting reports are Balance Sheet and Forecasting.
The basic formula for a Profit and loss statement is:
Revenue – Expenses = Profits
Below is our introduction video to the Profit and Loss Account.
Profit and Loss account – Management accounting
A profit and loss account is a useful tool for management decisions, as it looks at the costs which relate to sales during the period. It may be that you are selling your goods at 50% higher than you are buying them, but when taking into account all the overheads you are making a loss.
It is worth reviewing the pricing, sales and costs to see how future figures can be improved.
Management will compare two periods to see how the business is doing over time.
Accounting Profit and Loss Terms
Below are some of the terms found on the profit and loss account.
Income or Turnover – This is the figure for total sales. If you sell several different categories, they are listed separately and then a total.
Cost of Sales – The total of the direct goods relating to the sales. An example might be a product or direct labour.
Gross Profit – Total income minus the cost of goods sold.
Operating Expenses – These are the general running expenses of a business and include admin costs, stationery, insurance, rent and rent.
Net Profit – Once all the expenses are taken off the gross profit, you are left with the Net Profit. It is the actual profit of a business.
What is Included in the Profit and Loss Statement
The profit and loss statement will show the business name and the period that the statement is for, this can be a week, month, quarter, year or any period that you require.
The figures posted to the profit and loss account may not be the same as the transactions in your bank account. Instead, they are the figures that relate to the period in connection with the sale or expense.
An example of this: during a month a business made sales of £1000, but no goods were purchased; instead existing stock of £500 was sold. Post the figure of £500 as a cost of sale on the profit and loss account.
There are several other differences between the bank account and the profit and loss account:
- Sales – Include the sales when they take place; this may not be the same month as when payment is received.
- Cost of Sales – Include all the costs that relate to the sales which have taken place.
- Accruals – Include any expense which relates to the month for which no invoice is received.
- Prepayments – You may receive an invoice for a period of time, like a year or a future date, post the correct amount in the right month it relates.
- Depreciation – If you own fixed assets, they are depreciated over a period, include a monthly figure in your accounts.
The account includes sales or turnover, less cost of sales, which will give you a gross profit figure. You then deduct all the overhead expenses and dividend payments to provide you with either a Profit or Loss figure.
Below are an accounting profit and loss example. The calculation shows a Gross Profit of 60,000 and a Net profit of 17,200.
Example Accounting Profit and Loss Statement
Profit and Loss Calculation
If we look further at the profit and loss calculation it is made up of the following figures:
- Sales – the total of hardware and consultancy of 120,000
- Cost of Sales – includes hardware and direct labour of 60,000
- Gross Profit – Sales 100,000 less cost of sales 60,000 giving a total of 60,000
- Overheads of 42,800 are deducted to leave a profit of 17,200
Profit and Loss Account Template
We have produced and free Excel accounting Profit and Loss template for a year. There are times when you want to view the whole years’ figures in one place, which allows you to see if there are variations during the year.
The template will enable you to set up your business name, enter the dates and categories for sales and expenses. It is suitable for both self-employed and Limited companies. The template is also known as an Income Statement.
The Income statement template is easy to set up and use. There are five sales and fifteen expenses categories that you can name to suit your business. If you have more categories, you can join some together.
Net Profit Margin Calculator
The figures from the report can be used to calculate the net profit margin. This figure is used to see how successful the business is. Find out further information and an example, use our net profit margin calculator.
For further reading, read the article from Accounting Coach.