What is a profit and loss account?

What is a profit and loss account?

Ok, your accountant has just sent you your profit and loss for the year, but what is a profit and loss account and what do the figures actually mean?

Simply put, a profit and loss account statement details how much money your business has made or lost over a period of time (usually a month or a year).

This guide will talk you through your profit and loss statement from top to bottom.

Turnover

The top line of the report details your gross income. This is the total of all income received during the period. The term ‘gross’ simply means that nothing has been deducted from it.

Cost of sales

The next lines are for the cost of sales. This is the actual cost of the goods sold ie the raw materials, supplies and the labour involved in assembling the product. If you don’t produce or sell goods but provide a service the cost of sales will be the costs associated with delivering the service. For example, if you are a sports therapist the costs involved would be any oils, tapes or products used in the therapy.

Gross profit

This is simply the turnover less the cost of sales. The reason this is important is that it lets you know if you are pricing your goods or services correctly. If your turnover was £5000 but your cost of goods was £4950 you are only allowing yourself £50 for your overheads and so are very unlikely to make a profit.

General expenses

This combines all of the other costs involved with running your business. This will include premises costs, post and stationery, advertising, wages, professional fees, insurance and travel and subsistence (this is by no means an exhaustive list). The reason these are listed separately from the cost of sales is that they are not directly related to income / turnover and so need to be carefully controlled.

Net profit

This figure is your turnover less all expenses and is sometimes referred to as the bottom line. This shows you if the costs involved in running your business are greater than the income. This is the figure that will dictate your tax liability and also how much money you have made from the business.