Understand a profit and loss sheet
At its most basic, a profit and loss sheet is a good way to keep
on top of your business's finances and the health of your business
- and if your business is a limited company or a partnership whose
members are limited companies, you're legally obliged to produce
one once a year. But it has other very useful functions too.
This guide introduces you to:
- What a profit and loss sheet is
- What it's useful for
- How to create it
What a profit and loss sheet is
A profit and loss sheet shows, quite simply, whether you have
made a profit or a loss in a given period of time - usually over a
year. To get to the final figure, you deduct total expenditure from
total income. It typically includes your gross income (excluding
VAT), net income, gross profit, operating profit and profit before
tax, then deducts from these, respectively, discounts and
allowances, cost of sales, overheads, adds other income, and
deducts tax from profit.
- Shows whether you have made a profit or loss in given time
period
- Deduct total expenditure from total income
What it's useful for
HMRC use most of the information on your sheet to work out your
annual tax bill. From your point of view, as well as helping
you keep on top of your finances, a profit and loss sheet is used
for showing how the business is doing to the people who need to
know - owners, investors or potential investors, shareholders and
banks. It's one of the first things they ask to see. It also helps
you forecast your cash flow and profits, and plan future
strategies.
- Work out tax bill
- Keep on top of finances, make financial forecasts and form
strategies
- Show to investors and other financially-involved people
How to create it
You can lay out your profit and loss sheet manually on paper,
although using a computer spreadsheet is probably more reliable and
much easier to update. You may want to use basic accounting
software, which lays everything out for you. You then total each of
the following amounts: gross income less discounts and allowances,
net income less cost of sales, gross profit less overheads,
operating profit plus further income, and profit before tax less
tax. Lay each item out in separate columns, including separate
columns for each amount that you deduct or add. Then total all of
them to get your net profit or net loss. If you are VAT registered,
you need to account for VAT - speak with HMRC about how to do this
as they can provide you with the documentation.
- Manually or using software
- Lay out each item in a separate column then total and deduct
for final figure
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