Transcript Profit and Loss

The Profit and Loss Account
Geoff Leese Sept 1999 revised
Sept 2001, Jan 2003, Jan 2006,
Jan 2007, Jan 2008, Dec 2008
(special thanks to Geoff Leese)
1
Profit and Loss Account


2
A profit and loss account is a summary of business
transactions for a given period - normally 12 months.
By deducting total expenditure from total income, it
shows on the "bottom line" whether your business
made a profit or loss at the end of that period.
A profit and loss account is produced primarily for
business purposes – to show owners, shareholders
or potential investors how the business is performing.
But most of the information is also used by the Inland
Revenue to work out your tax bill.
Trading Account
That part of the profit and loss account
where the cost of goods sold is
compared with the money raised by
their sale to arrive at the gross profit
 This gives a view of the business in
terms of sales and viability of profit

3
Retail trading account for Nov
£
Sales
Opening stock
Purchases
Less closing stock
Cost goods of sold
Gross profit
4
£
50 000
12 000
30 000
42 000
15 000
27 000
23 000
Yearly Profit and Loss



5
By law, if your business is a limited company or a
partnership whose members are limited companies,
you must produce a profit and loss account for each
financial year
Self employed sole traders and most partnerships
don’t need to create a formal profit and loss account the information they complete on the self assessment
tax return form amounts to the same thing
However, there are key benefits to producing formal
accounts. If you are looking to grow your business, or
need a loan or mortgage, for example, most
institutions will ask to see three years’ accounts
Keeping accurate records


By law business must keep accurate records of income and
expenditure. Keep self-employment records for five years and
limited company/partnership records for six years after the
latest date your tax return is due
Accurate record keeping has important benefits. It:









6
gives information to manage your business and make it grow
enables reporting on profit/loss easily and quickly when required
will improve your chances of getting a loan or mortgage
makes filling in your tax return easier and quicker
helps you or your company avoid paying too much tax
provides back-up for claims for certain allowances
helps you plan and budget for tax payments
prevents interest or penalties for late tax payments
helps reduce accountant fees - your annual accounts will be far easier
to produce
The basic records you will
need to keep are:







7
a list of all your sales and other income
a list of all your expenditure, including day-to-day
expenses and equipment
a separate list for petty cash expenditure if relevant
a record of goods taken for personal use and
payments to the business for these
for limited companies: a record of money taken out
for personal use or paid in from personal funds
back-up documents for all of the above
You will need the information above to create your
profit and loss account
The Profit and Loss Account
The profit and loss statement shows the trading
performance of the business and the
distribution of profit. Profit is not equivalent to
cash in bank
Income
Customer sales, profit/loss from sale of tangible fixed assets,
“non operating” income, investment income
Expenses
Variable (direct) costs, Fixed (overhead) costs, interest paid,
depreciation allowance on tangible fixed assets
Distribution
Drawings/dividends, retained profit
8
Profit and Loss account
Measuring profit
Income
Expenses
The profit and loss statement shows
the trading performance of the
business and the distribution of
profit.
Increase in assets
9
Net Profit
Drawings or
dividends
Retained
profit
Or measuring loss
Turnover
Costs
Net Loss
Drawings or
dividends
Decrease in assets
10
Retained
loss
SIMPLE COMPANY LTD - Profit and loss account for
year ending 31.12.08
£
Turnover
Cost of sales (Direct costs)
Gross profit
Expenses (Overheads)
Other Costs (Depreciation)
Operating profit
Non-operating income
Interest payable
Profit on ordinary activities before
taxation/Net profit
Corporation tax
Profit after tax
Dividends
Retained profit for the period
11
950,000
525,000
425,000 Trading account
325,000
10,000
90,000
24,000
15,000
Profit and Loss
99,000 Account
22,500
76,500
30,000
46,500
Appropriation
Account
Cost of sales (Direct costs)
£
Production wages
Material costs
Opening stock 01.01.08
Plus purchases during the year
Less closing stock 31.12.08
Cost of Sales
12
£
110,000
110,000
500,000
610,000
195,000
415,000
415,000
525,000
Expenses
(overheads)
£
Wages and salaries (admin)
140,500
Heating and lighting
35,500
Rent and rates
40,000
Telephone
10,000
Advertising
16,000
Car expenses
42,000
Printing and stationery
17,000
Accountant fee
5,000
Insurances
10,000
Provision for bad debts
9,000
£
325,000
Other Costs
Depreciation
10,000
335,000
13
Depreciation



Fixed assets such as cars, computers, and machinery are
not treated the same as other expenses.
Instead of being offset against revenue in the year of
purchase, a proportion of the purchase value is allowed as
an expense each year over the life of the asset.
At the end of the useful life of the asset, it is disposed of
(scrapped or sold) and added into the P&L account as non
operating income
Typical example
Computer £ 1100, life of 3 years, expected to make
£50 at disposal
Depreciation (£1100-£50)/3 = £350 per year
14
Interest and charges
£

Non-operating income


Interest on bank accounts
Other investment income
Interest payable



15
24,000
0
24,000


£
Loan interest
Overdraft charges
12,000
3,000
15,000
Simple Home Trader P&L Account for year ending March 31st 2008
Consultancy fees
Overheads
Depreciation
£2150
Overdraft cost
£80
Car expenses
£1500
Other transport
£550
Telephone
£430
Stationary
£700
Insurance
£350
Net Profit
Drawings
Net profit retained in business
16
£17,700
£5,760
£11,940
£7,000
£4,940
Taxable
amount for
inland
revenue
returns
Financial Ratios (Profitability)
Monitoring direct costs (manufacturing companies)

Gross profit margin = Gross profit / sales

Cost of materials (%) = materials costs / sales

Cost of labour (%) = labour costs / sales
Monitoring overhead costs

Net profit margin = Net profit / sales

Overhead cost (%) = Overhead costs / sales
17
Simple Company Limited profit ratio analysis
















18
Turnover
Cost of sales (Direct costs)
Gross profit
Expenses (Overheads)
Other Costs (Depreciation)
Operating profit
Non-operating income
Interest payable
Profit on ordinary activities before
taxation/Net profit
Corporation tax
Profit after tax
Dividends
Retained profit for the period
Gross profit margin
Overhead cost
Net profit margin
Year
525,000
10,000
99,000
46,500
34.2%
2008
2007
950,000
500,000
425,000
325,000
12,000
90,000
24,000
15,000
800,000
450,000
300,000
200,000
15,000
88,000
20,000
16,000
92,000
22,500
76,500
30,000
44,000
88,000
20,000
72,000
28,000
40,000
44.7%
25%
10.4%
37.5%
21.4%
11.5%
2006
700,000
250,000
150,000
85,000
20,000
17,000
18,000
70,000
30,000
35.7%
12.6%
Further Reading

Dyson, J.R. (2001); Accounting for Non-accounting
Students (5th edn); Prentice-Hall (other editions
exist)




Chapter 3 (Covers book-keeping)
Chapter 4 (Covers Profit and Loss and Balance Sheet)
Chapter 5 (Covers adjustments)
Chapter 6 (covers all of these in a company context)
A substantial amount of reading – some 100 pages in all.
But necessary.
19