All companies require an accounting Profit and loss statement (P&L) or Income statement for their accounts. There are several reasons why you need the financial report, including:
- If registered at Companies House, annual accounts are submitted. An accountant typically prepares the reports.
- If you are self-employed, the Profit and Loss (p&l) Statement figures are required to complete your self-assessment return.
- The report may also be required monthly or weekly to assist in financial business decisions.
- When creating a business plan, it is one of the financial reports.
The other main financial reports are Balance Sheet and Cash Flow forecast.
Below is a link to our free Profit and Loss Template download, which is easy to use and suitable for small business. Full instructions are available.
What is a Profit and Loss Statement?
It shows all the company’s income and expenses incurred over a given period. The final figure will show the financial performance and show if the business has made a profit or loss. Create the report either annually, quarterly, monthly or even weekly.
There are two accounting principles that small business uses to produce a P&L; accruals and cash accounting.
Cash Accounting is when the business enters the figures for revenue or expenditure on the transaction date. Accruals adjust the figures for when the transaction takes place.
An example of accruals is when a business sells a stock item, you record the cost of goods sold when the transaction takes place and not when stock arrives and is invoiced.
Small businesses produce an Income statement either through bookkeeping software, in Excel or manually. The easiest method is to use the best accounting software.
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 valuable tool for financial decisions, as it looks at the costs related to revenue during the period. You may be selling your goods at 50% higher than you are buying them, but you are making a loss when considering all the overheads.
It is worth reviewing the pricing, revenue and costs to see how you can improve future figures.
Management will compare two periods to see how the business is doing over time.
Each report shows different figures for the business:
- The Profit and Loss shows the revenue and expenditure for a given period
- The Balance Sheet shows a snapshot of the accounts on any date and used by business owners, investors and banks. It includes all the assets, liabilities and equity of a business.
- The Cash Flow statement looks forward to when the business expects to receive or spend cash.
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. Another term for it is total revenue
Cost of Sales – The total of the direct goods relating to the sales. An example might be a product or direct labour.
Gross Profit – The total income of the business, minus the cost of goods sold.
Operating Expenses – These are the general running expenses of a business and include admin costs, stationery, insurance, rent, interest and rent. Operating expenses also include the depreciation of assets.
Net Profit – When you take off the expenses from the gross profit, the balance is the Net Profit. It is the actual profit of a business.
Trial Balance – A trial balance shows all the figures from both the p&l and balance sheet. It is a useful report for accountants and bookkeepers.
What is Included in the Profit and Loss Statement?
The profit and loss statement will show the business name and the period the statement is for; this can be a week, month, quarter, year, or any period you require.
The figures posted to the P&L 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 you purchased no goods; instead, they used the existing stock of £500. 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:
- Revenue – Includes the sales when they occur; this may not be the same month as when payment is received. It will also include non-operating income; an example is interest received. It is broken down to earnings before interest and interest.
- 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, like a year or a future date, post the correct amount in the correct month it relates.
- Depreciation – If you own fixed assets, they are depreciated over a period of time; include a monthly figure in your accounts.
The account includes turnover, and 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 a Profit or Loss figure.
Below is an accounting profit and loss example. The calculation shows a Gross Profit of 60,000 and a Net profit of 17,200.
How to Read a P&L
The report starts with sales and then deducts the cost of sales (the cost of goods and services sold during the period) to arrive at gross profit. From there, expenses are deducted to arrive at net income.
Example Accounting Profit and Loss Statement
Below is a Profit and Loss account example in the UK for a period of a year.
Profit and Loss Calculation
Using the above P&L example, we can make the following calculations:
- Turnover or total revenue – the total of hardware and consultancy of 120,000
- Cost of Goods Sold – includes hardware and direct labour of 60,000
- Gross Profit – Sales 100,000 less cost goods sold 60,000 giving a total of 60,000
- Overheads of 42,800 are deducted to leave a profit of 17,200
Profit and Loss Template UK
We have produced and free Excel accounting P&L template for a year. There are times when you want to view the whole year’s figures in one place, allowing you to see variations during the year.
The Profit and Loss template will enable you to set up your company’s name and enter sales, expenses, dates, and categories. It is suitable for both individuals and Limited companies. The template is also known as an Income Statement.
The Profit and Loss 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
You can use the figures from the report to calculate the net profit margin. You use the figure to see how successful the business is. Find out further information and an example, use our net profit margin calculator.
Profit and Loss Statement FAQ
Do all businesses need a P&L Statement?
If you are a Limited company, you will need to submit a P&L statement to Companies House. A small self-employed business will need the figures for your tax return, but you can use a cash book for a simple set of figures.
What is the best way to create a Profit and Loss Statement template?
The best way is to use good bookkeeping software, such as Xero, FreshBooks or QuickBooks. The software includes Profit and Loss templates and filters to adjust the report to give the information required. You can also use Excel and our free P&L template.
What is the difference between the P&L and Balance sheet?
The P&L shows the income and expenditure for a given period. It will show if the business has made a profit or loss. The Balance Sheet shows a snapshot of the business at any given time. It lists all the assets, liabilities and equity.
For further reading, read the article from Accounting Coach.