A profit and loss account outlines your business’ revenue and expenses over a certain time period. As you’d expect, its purpose is to see how your business is performing by comparing current profit levels at the same time last year or month. You’ll need a few different things to prepare a profit and loss account, including transaction records and all sources of income. Here’s what else you need.
The Information You Need to Prepare the Account
To create the profit and loss statement, you’ll need:
- A detailed record of all the transactions made via your business account.
- Petty cash transactions that you have made in the same period. Head over to this blog if you’re not sure how to reconcile the petty cash fund.
- The different income sources received by your business. These include online payments and cheques. Your bank statement is a good place to find all of these in one place.
- Don’t forget any cash payments you’ve received too. This can be a little complicated, depending on the software or tool you’re using to create the profit and loss statement.
Creating a Profit and Loss Statement
If you’re an established business that has previous records to work off, then you’ll create a periodic profit and loss statement. On the report itself, you’ll list the net income for each quarter of the year. There’s no need to outline exactly where this money has come from but it can make reviews easier if you keep that information recorded in sub-sections.
Next, outline the different expenses your business has made during the same period. With these figures, you can determine your earnings before tax, interest on business debt and the estimated taxes on net income. Finally, you’ll have your profit or loss figures.
Helpful Terms You Might Need to Know
When creating a profit and loss statement or researching what the figures mean, you may encounter specific terms and key phrases. It’s critical that you know the definition of each of these phrases.
Net income - Your business’ total earnings. This is the figure that you’re left with once you minus the cost of goods, expenses and taxes from your income.
Net profit - This is your actual profit. This figure is the amount left over after expenses have been deducted from gross profit.
Gross profit - This is the total revenue figure minus the cost of goods sold.
Operating profit - You’re left with your operating profit figure once you minus operating expenses (like building costs and utilities) from gross profit.
What a Profit and Loss Statement is Used For
Once you’ve entered all of the relevant information into the statement and you have the important figures, you can calculate vital tax payments. Income and corporation taxes musto be paid and this statement ensures you pay the correct amount.
Fail to pay the correct amount and you’re more likely to face added interest or even penalties from HMRC. The statement makes the whole process a lot less time-consuming and stressful. Instead of having to worry about incorrect figures, you’ll always know you’ve operated from accurate information.
Having accurate and recent business financial data to work from allows you to make more informed decisions. Once you’ve been established for a few years, you can look back on previous statements to determine patterns and overall performance.
It’s always useful to see in black and white the changes in revenue and spending your business has experienced over time. These patterns are incredibly useful and are a good reminder of how far you’ve come since day one.
A profit and loss statement is just one aspect of bookkeeping that you’ll need to prioritise to keep good financial records. To help with the process, we’ve created free templates for you to use.
Download a Free Profit and Loss Template
To make creating your own profit and loss account simple and straightforward, we’ve created free templates for you to use. Simply enter your own figures and you’ll be able to accurately forecast tax and profit figures.
Our profit and loss template is part of a number of helpful templates we’ve created to make small business bookkeeping simple and easy to do. Whether you’re keeping track of a petty cash fund or recording important business expenses, download our free templates now to make your life a whole lot easier.