Accounts of Profit and Loss (P&L) - A Guide for Small Business Owners

One of the most effective instruments in your financial armoury for determining how well your firm is doing is your profit and loss account (P&L).

This is a simple set of numbers that will give you an overview of what your company has spent and sold over the course of a year.

Importantly, a P&L statement will inform you how much profit or loss your company has made, therefore it's important to understand it.

For a small business owner, here's an outline of Profit & Loss Accounts.

Every year, limited companies must produce P&L accounts.

If you run a limited company, you must submit a profit and loss account to HMRC every financial year. They'll use it to figure out how much corporation tax your company owes.

You probably won't have to submit a formal P&L if you're self-employed or in a partnership. However, it's a useful task to complete because it shows you what's going on in your company. In addition, the information you gather will aid you in completing your self-assessment tax return.

If you want to apply for a mortgage, take out a loan, or acquire other finance for your business, you'll need a P&L.

Accurate financial records are the foundation of a solid P&L.

Keeping correct financial records is the foundation of a solid profit and loss statement. This is a legal requirement, and it entails acquiring a receipt for everything you buy and maintaining a copy of every transaction or invoice you send out.

Keep track of any other income you receive, how you use petty cash, and any personal payments you make for things (for example if you run a shop, you need to record when you take goods and how you pay for them).

If you manage a limited company, you must keep track of any money you take out for personal purposes as well as any personal loans you make to the firm.

Types of revenue

To generate your P&L, you categorise revenue in one of two ways and expenditure in one of three ways:

Sales generate revenue for the company.

You should maintain track of every sales in your company and have papers to back up your claims. If you own a store, the paperwork will be on your till roll. Alternatively, if you send out invoices, they will be counted.

You should also retain all of your bank statements and pay-in slips. All of these things work together to show how much money is flowing into your company.

Other income from a business

You might be able to supplement your income with money from other sources in addition to sales. For example, your company may collect interest on bank accounts or rent out a portion of its space to other firms. This is where you keep track of any personal funds you invest into your limited partnership.

Expenditure classifications

There are three sorts of business expenditures:

Sales expenses

This is the initial method of keeping track of money in and out of your firm. It has to do with the initial costs of producing your product. If you have an order for ten widgets and have to buy ten tubs of goo to fulfil it, those tubs are considered cost of sale. You wouldn't buy them unless you were in desperate need of something.

There are other costs of sale, such as labour to make it, machine rental, and other production costs. If you merely provide a service, the cost of sales usually does not apply.

Expenses for the company

This category includes all of the continuous costs of running a firm, such as rent, personnel, and general administration. Your Croydon accountants will advise you on which expenses to include in this section.

Sometimes expenses aren't allowed for tax purposes and must be deducted before calculating your taxable earnings - again, your accountant can advise you on how this will affect you.

Equipment costs

Finally, keep track of the costs of any long-term equipment you've purchased or rented. Computers, trucks, furniture, and machinery are examples of fixed assets, often known as capital items.

You can spread the cost of a piece of equipment over several years rather than recording it all in one year. For example, if you spend £300 on a computer, you might elect to account for £100 over three years. Depreciation is the term for this. A fixed asset registry is required for larger businesses.

Accountants in Croydon help small businesses and startups with their accounting and taxation matters, to keep their business running smoothly.