The Profit and Loss account shows total sales, less the expenses for the business. This will either show a trading profit or loss. This is often referred to as the bottom line or Net Profit. It is this amount on which sole traders and partnership’s income tax liability is calculated (Corporation Tax for Limited Companies). Some adjustments may be required to comply with HMRC regulations.
Only amounts that relate to your actual trading are included in the Profit & Loss account. Capital allowances (for the purchase of equipment / vehicles, for example) may be available to reduce your final tax liability.
The figure at the top of a Profit And Loss account will be the total “Sales” or “Turnover”. This is the total amount of funds received / invoiced and equates to the value of the work / sales undertaken in the year.
Sales Income: the total amount of sales or sales invoiced during a period.
Variable costs: Represents the direct costs of the sales made. This will be the cost, to you, of the goods or materials sold. Note that it is the cost of the stock actually “used” to achieve the sales. It is not the total stock you have purchased, only the stock that you have used.
Gross Proﬁt: Sales minus Variable Costs
Fixed Costs: Expenditure other than variable costs. The fixed costs are often referred to as overheads. Examples would be rent, wages, and marketing
Net Proﬁt = Gross Profit minus Total Fixed Costs
A very useful ratio is calculated from the Profit & Loss Account, this is:
Gross Profit % = Gross Profit ÷ Sales
The gross profit margin ratio shows the profit a business makes on its cost of sales, or cost of goods sold, and indicates how much gross profit per £1 of turnover a business is earning.
Gross profit margin should be stable over time.
The following example shows a completed Profit and Loss Account.
|Projected Trading Profit and Loss|
|Total Variable costs||36,630|
|Rent and Rates||8,000|
|Postage and stationery||100|
|Total Fixed Costs||10,680|
For sole traders and partnerships, the final profit figure (£19,290) has to cover taxation, drawings and any loan capital repayments. For limited companies, the directors salaries are included in the fixed costs, hence the profit needs to cover corporation tax and loan capital repayments.
Gross Profit = Sales (66,600) – Variable Costs (£36,630) = £29970
Gross Profit % = 29,970 ÷ 66,600 x 100 = 45%
Net Profit = Gross Profit (29,970) – Fixed Costs (10,680) = £19290
If you are struggling with your profit and loss projection, download our handy financial forecasting template, which includes a profit and loss sheet by clicking here.