What Is A Profit & Loss Account

A company has to produce and disclose its financial results. The size of your company and its financial success will determine where you have to lodge your accounts and what certain styles you have to comply with. If your company is a limited company, plc or LLP then you will be required to register accounts with Companies House. When preparing your financial statements you will have a turnover figure which is separate to the profit figure.  The degree of this turnover figure will stipulate whether you must have your financial statements audited. If your business is a partnership or you are a sole-trader, then you do not have to report and register your accounts to Companies House.   Companies House is the agency that monitors and registers companies under today’s regulations and Governments. H M Revenue & Customs do demand that partnerships and sole traders do report and follow their legislation and therefore you must submt your profit or loss to them, the same as limited companies, plc’s and LLP’s have to. Even though you are not required to lodge accounts, it can still be better to prepare a small set of minimal accounts, including a profit and loss account. This can then be sent along with your tax return to affirm any entries on your tax return. Banks and financial companies use profit and loss accounts when they get applications for any kind of finance. So what is a profit and loss account and how do you produc one?

If you nust use your business bank account or are given a receipt for the business you need to check for any personal shopping or buying, whatever the item is (women’s jewelry or anything else for the home or family), then you must ensure that it does not get included the accounts as business costs.

By summarising your financial transactions into useful important categories, this will produce a profit and loss account for a certain time period which at the end of the summary will disclose if your company has made a profit or loss. The top half of a profit and loss account shows the income for the business over a specific time period and the bottom section will show the company’s expenditure.   Anyone can produce their own profit and loss account following this basis.

The income half of the profit and loss account is then divided into two further categories which are turnover and other income. Your turnover figure summarises your source of income from your product sales or services for that given time. There are numerous ways you may record your day to day/weekly or monthly income so that you can have all the data together effortlessly.   You might do this by makng use of a handwritten accounting ledger, by using an uncomplicated computer spreadsheet or you might think about purchasing an accounting software program.

Any other revenue the company receives such as rental revenue, bank interest, additional cash or funding or sale of any equipment is categorised under other income. A company will need to analyse their expenditure into three main headings which are business expenses, cost of equipment and cost of sales. Business expenses  which are spent in connection with the making or creation of your product of service you sell are called cost of sales. General company expenses which are essential for your company to work including insurance, rent and rates, administrative expenses such as stationery will all be collated under the heading of business expenses. All the expenses  for any equipment for the business is grouped under the category of cost of equipment.   This will include cost of purchasing and leasing equipment which will also cover any cars and vans the business owns or tools and machinery the company purchases.

It is essential that you manage the admnistration of receipts and company outlay that is claimed for, so that no personal expenditure, e.g. a new women’s belts, does not get included.

When deciding on your accounting period, being a self employed or a partnership, it is easier if you prepare your accounts on an annual basis with the year ending either on 31 March or 5 April. By deciding on the dates of 31 March or 5 April, it will make your accounting and tax return submission better as the figures will conincide with each other. If your year end is not in sync with these dates, you can prepare a set of [financial statements] accounts for a particular date period and then start again with annual financial statements. This means for instance that you begin your first accounting period from the start to either 31 March or 5 April, which might not be a complete year and may be a number of months. You will now have a new year end date and will produce annual accounts from this date forward.

To support your accounting data, you should keep all your receipts and records supporting how these figures were prepared. It is a legal requisite that you need to keepall your supporting ledgers and papers for at least six years in case the authorities request to view needs to be available.

Now you will be able to review and read your profit and loss accounts that your accountant prepares for you or be in a position to produce a draft one for yourself.