This page will explain what a profit and loss account is, when you should use it, and also explains the key terms you’ll come across.
What is a profit and loss account?
A profit and loss account shows a company’s revenue and expenses over a particular period of time, typically either one month or consolidated months over a year. These figures show whether your business has made a profit or a loss over that time period.
Profit and loss accounts show your total income and expenses, and also shows whether your business has earned more income than it has spent on its running costs. If that is the case, then your business has made a profit.
The profit and loss account represents the profitability of a business. It cannot, for example, show you if you are running out of cash as you build stock. For this sort of insight, you’ll need a balance sheet.
The profit and loss account is also known as a P&L report, an income statement, a statement of operation, a statement of financial results, or an income and expense statement.
What does a profit and loss account include?
A profit and loss account will include your credits (which includes turnover and other income) and deduct your debits (which includes allowances, cost of sales and overheads). These are used to find your bottom line figure – either your net profit or your net loss.
What is a profit and loss account used for?
The profits shown in your profit and loss account are used to calculate both income tax and corporation tax. Failure to file either of these correctly can result in you paying added interest and penalties, so it’s important to get this report right.
The P&L account takes revenues into account for a specific period. It also records any expenses or costs incurred by these revenues, such as depreciation and taxes.
This can be used show investors and other interested parties whether or not the company made money during the period being reported.
Profit and loss account terms explained
What is net income? This is your income minus the cost of goods sold, expenses and taxes.
What is gross profit? This is your total revenue / sales, minus the cost of those goods sold.
What is operating profit? This is the profit you have after operating expenses (like rent) are deducted from gross profit. It doesn’t include interest or tax deductions.
What is net profit? This is your actual profit. It’s the amount you’re left with after remaining working expenses are deducted from gross profit.
Calculating net profit
To calculate net profit, follow this path:
- Deduct discounts and allowances from your gross income (excluding VAT) to get your net income.
- Deduct the cost of sales from your net incomes to find your gross profit.
- Deduct overheads from your gross profit to get your operating profit.
- Deduct any other expenses from your operating profit (plus any other income) to find your profit before tax.
- Deduct tax to reach your net profit or net loss.
Profit and loss accounts in KashFlow
In KashFlow, you simple have to go to the Tools & Reports section and run a Profit & Loss Account. It’s one of the many financial reports KashFlow generate for small businesses. You can learn more about the process here.
You can start a free trial of KashFlow, and see how financial reports give you a better insight into your business, by following this link.