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, costs, and how much profit the business made for the period the statement covers which is usually 12 months.

Anyone can prepare the statement, although most businesses choose an accountant to ensure accuracy. The P&L belongs to the general bookkeeping set of accounts that also includes a Balance Sheet and cash flow forecast. The key headings include sales, expenses, and profit before tax.

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.

Note Heading Value
1 Income/ Revenue/ Sales £10,000
2 Cost of Sales £4,000
3 Operating Profit £6,000
4 Other Direct Costs £1,000
5 Gross Margin £5,000
6 Expenses £2,800
7 Depreciation £200
8 Profit Before Interest and Tax (EBIT) £2,000
9 Net Interest Paid £500
10 Corporation Tax £500
11 Net Profit After Tax £1,000

You can prepare a simple P&L yourself by developing an Excel spreadsheet using the sample headings shown above.

The template is the same whether you're a sole trader or limited company and you should direct any questions to your accountant. A consolidated profit and loss is the same format but generally consolidates a couple of business streams.

Notes to the Accounts

Here are the notes for the above P&L

Note 1: Income

Add all income from sales for the period the profit and loss statement includes whether or not you've received payment for the sale. If you've made the transaction but not received the cash, then this will be added to your debtors account on 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've purchased stock, then this should be entered on the balance sheet. Only stock used in the accounting period gets recorded into the P&L.

Note 3: Operating profit

This line reports the first summary of 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 figure is just a calculation of operating profit less other direct costs.

Note 6: Expenses

Expenses or overheads are all other costs you've received invoices for during the period. These may include:

  • Rent and rates
  • Professional fees, such as legal, accounting and business insurance
  • 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

List all the expenses in this section here. You should add items invoiced but not yet paid to your creditors' list.

Note 7: Depreciation

This line is an accounting adjustment and not directly used for tax calculation purposes. The tax authorities tell you what depreciation values you can use rather than 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/ Earnings before interest and tax

The EBIT calculation makes it easy to compare results between different companies. The reason for this is that interest received is not dependant upon the company selling more products. Corporation tax also make the results meaningless.

Note 9: Interest

This entry summarises 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: Net profit after tax

And finally, the net result is what's left. It's a calculation of all invoiced income less all invoiced expenses and purchases less interest and tax paid. This result provides your overall profit or loss in the period of the accounts.