Understanding profit and loss accounts

Profit and Loss

A profit and loss account shows how profitable your business is over a specific period of time.  It’s one of the 3 main financial reports you need  for monitoring how well your business is performing, the others being a balance sheet, and a cash flow forecast.

What is a profit and loss statement

Profit and loss statements record sales income costs and expenses, and show business performance over a specific period of time.  Profit and loss accounts:

  • Show business performance over a specific period of time
  • Record income (revenue from sales) and outgoings (cost of sales plus overheads and expenses) and show whether an overall profit or loss has been made
  • Show a summary of invoices that have been raised, or sales income that has been generated, including an estimate of work in progress but not yet invoiced
  • Include purchases from suppliers for goods or raw materials, and an estimate of cost for goods/raw materials used but not yet paid for

One of the important things to remember about profit and loss is that it doesn’t record whether invoices raised or received have been paid, so it doesn’t indicate the health, or otherwise, of your cash flow.  It’s very possible for a business to be running at a profit but still run out of cash!

If you’re running a limited company, your annual profit and loss statement, together with your balance sheet, form part of the annual statutory management accounts required by Companies House.

For a closer look at profit and loss accounts see How to create a profit and loss account

What does a profit and loss statement look like

A profit and loss statement will look something like this:

 Income  £ 50,000
 less discounts and allowances  (5,000)
 Net income  =45,000
 Less direct costs (cost of sales)  (20,000)
 Gross profit  =25,000
 Less indirect costs (fixed overheads)  (7,000)
 Operating profit  =18,000
 Plus other income  2,000
 Less other expenses  (1,000)
 Profit before tax  19,000
 Less tax  (8,000)
 Net profit (or net loss)  =11,000

Creating a profit and loss statement

The figures in a profit and loss statement come from all over your business.  It’s best to decide from the outset how to lay out and categorise your day to day receipts and expenses.

For more information see How to create a profit and loss account

Profit & Loss templates

Free profit and loss templates are available from the Microsoft Office Online website.