The Profit and Loss Account

The Profit and Loss statement (P&L) is generally prepared annually and forms part of the accounting documents a limited company and sole trader need to produce to satisfy the tax authorities.

It shows revenues and costs and how much profit has been made by the business over the period it has been prepared for.

Anyone can prepare the statement although most businesses choose an accountant and is part of the general bookkeeping set which also includes a Balance Sheet and cash flow forecast. The general headings include gross profit, net profit, operation profit and profit before tax. You can prepare a simple P&L yourself by developing an excel spreadsheet using the sample headings that are shown below.

Example Profit and Loss and Notes

Here's an example and format of a profit and loss account that shows the standard headings and the notes for further analysis. The template is the same whether you are a sole trader or limited company and any questions should be put to your accountant. A consolidated profit and loss is the same format but generally consolidates a couple of business streams.

1:Income/ Revenue/ Sales10,000
2:Cost of sales4,000
3:Operating Profit6,000
4:Other direct costs1,000
5:Gross profit5,000
8:Profit before tax and interest (EBIT)2,000
11:Net Profit after tax1,000

Notes to the Accounts

Here are notes for the above P&L

  • Note 1: Income: All income from sales should be added for the period the profit and loss is being prepared for whether or not your have received payment for the sale. If you have made the sale and not received payment then this will be added to your debtors account in your balance sheet.
  • Note 2: Cost of sales: These are all costs directly associated with the sales mentioned above. They may include the cost of the product purchased and wages for people making the product. These are items invoiced in the period whether or not you have paid for them. If you have purchased stock then this should be entered into the balance sheet and only stock that has been used in the accounting period gets entered into the P&L.
  • Note 3: Operating Profit: This is the first summary on the account and is simply income less cost of sales.
  • Note 4: Other direct costs: If you have additional costs associated with the sales made other than wages and cost of goods sold then enter them here.
  • Note 5: Gross profit: This is simply a calculation of operating profit less other direct costs
  • Note 6: Expenses: or overheads which are all other costs you have been invoiced for during the period. These will include, rent, rates, professional fees such as legal and accountants, marketing, distribution and warehousing, vehicle costs such as fuel and maintenance, technology and computer costs such as hosting, back office staff salaries, national insurance, pensions and bonuses, stationery and postage, utility costs such as heating, water, gas and electricity. Simply list all the costs here. For items invoiced and not yet paid these will be added to your creditors list.
  • Note 7: Depreciation: This is an accounting adjustment and is not directly used for tax calculation purposes as this is done offline because the tax authorities tell you what depreciation values you can use rather that what you have applied in your P&L - the other entry goes below fixed assets on your balance sheet to calculate the net asset figure.
  • Note 8: Profit before tax and interest: General the EBIT calculation is made so that company results can be compared with one another as interest received is not dependant upon the company selling more products and corporation tax may make the results meaningless.
  • Note 9: Interest: This is interest and bank charges paid from your business within the accounting period.
  • Note 10: Tax: Tax will be the estimated amount of corporation tax on the business
  • Note 11: And finally the net result is all of your invoiced income less all of your invoiced expenses and purchases less interest paid and tax to be paid gives your overall profit or loss in the period you are accounting for.