Profit and Loss Account

2. Profit and Loss Account

A Profit and Loss Account takes your total costs away from your total sales and shows the bottom line - whether your business has made a profit or loss at the end of that period (usually 12 months).

The information in the Profit and Loss Account is used by HM Revenue and Customs to check your calculations for tax and Class 4 National Insurance Contributions. It is also used by owners, shareholders and potential investors to understand how the business is performing.

There are key differences between a Profit and Loss Account and a cashflow forecast:

The Profit and Loss is based on income and expenditure for a specific time period. This means it includes sales that you have invoiced but may not yet have received payment for and costs and expenses that you have not yet paid.

It also includes intangible costs such as bad debt and depreciation and takes into account closing stock (as sales from closing stock will be generated in the next period).

Drawings and NI contributions are not included in a Profit and Loss Account. A Profit and Loss Account does not include VAT on sales or costs.

It may be helpful to download profit and loss account at a glance (MS Word 49kb).

3. Example Profit and Loss Account

Here’s an example of a Profit and Loss Account:

Violet’s Florists – Profit and Loss Account – Year Ending 31/12/2012

Violet’s Net Profit for the period is £21,600 pre-tax.