We’ve already looked at the role of what PAYE is for a business and how you can put a business plan together, now it’s the turn of the profit and loss sheet.
Clients often ask: ‘What is a profit and loss account?’ and I tell them that it’s simply the beating heart of the business.
That’s because you need to make a profit in order to be in business and many firms do their profit and loss account on a monthly basis – and this is the best course of action.
One reason for creating a profit and loss account – some refer to it as P&L – on a monthly basis means that you keep up with your accounts – whether you a freelancer, a one-man band or small firm.
The profit and loss account will quickly reveal what problems you are having in the business and what steps must be taken.
In a nutshell, the profit and loss account for a business is the primary statement of the firm’s financial statements.
As the financial year progresses, the profit or loss for the period you’ve just accounted for is added to the balance sheet.
As such there are two columns: one is for the current accounting year and another for the previous accounting period.
An accountant will be able to see at a glance whether there are any problems in the accounts or within the business.
You’ll have to pay attention here because HM Revenue and Customs will also use the same tactic to pinpoint where something might have gone wrong within your business accounts. This is where their questions will stem from.
For many small and medium-size firms, the profit and loss account can lead to confusion because the same term refers to more than one set of accounts.
There is the statutory profit and loss accounts which is the minimum amount of information needed to be filed at Companies House. These are the accounts which are available to the public.
Though it should be remembered that smaller companies don’t need to disclose as much as larger companies, they must still meet the proper deadlines for filing.
The detailed version of the profit and loss sheet is included in the end-of-year accounts report but doesn’t form part of the financial statements. Be wary about where your detailed profit and loss sheet is published since there will be information in there that is useful to a competitor.
Here at Yorkshire Accountancy we will go through the profit and loss sheet and highlight what could be a problem. For instance, a difference in the rent being paid in the two months being compared will need to be explained.
If you run a small business and want to see a regular profit and loss account being produced but don’t have the time or the confidence then you should ask your accountant to put one together for you.
Here at Yorkshire Accountancy we have a great deal of experience in doing this and we have clients across the UK.
The profit and loss account needs quite a bit of detail, including all the income and expenses, depreciation on fixed assets, interest payments and also salaries.
From the profit and loss sheet you can also prepare a tax computation which will include the tax charge that will be due if a taxable profit has been made.
Remember, you have to prepare a profit and loss sheet for the accounts and it makes sense to prepare the accounts throughout your financial year – and it makes even more sense to have a professional account do them for you.