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Profit and Loss

By: Jack Claridge - Updated: 24 Aug 2012 | comments*Discuss
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What is Profit & Loss?

Profit and Loss is the means by which an accountant – and owner of a company – can keep an accurate account of what money is coming in and going out of the business and also what money is not being spent wisely or recouped.

All business are required to file their accounts on average once a year and in doing so they must be able to prove – not only to the company’s directors but also Her Majesty’s Revenue and Customs (HMRC) how the company’s money is being spent and how the company is making – if at all – a profit.

A company must also ensure that it keep records of its profit and loss up to date and in good order so that they can be presented to an independent auditor or bank if necessary.

If you wish to apply for a bank loan or business banking facilities you may be required to present your bank with a copy of your business accounts plus a business plan and profit and loss can be an integrate part of this procedure.

Profit and Loss consists normally of the following:

  • Sales
  • Gross Profit
  • Direct Costs
  • Indirect Costs
  • Net Profit

Profit and Loss Accounts

In order to provide accurate information to directors, banks and Her Majesty’s Revenue and Customs (HMRC), your business must operate a Profit and Loss account. Many of today’s leading accountancy software packages have this facility built in and providing you enter the correct information the software will provide you will a comprehensive profit and loss account which can be shown to the aforementioned parties who have most interest in it.


This is the amount of money accrued by the business as a result of sales made to customers. The sales amount shown in your profit and loss account does not – and should not – show any VAT or tax – as the VAT and tax sums are paid to Her Majesty’s Revenue and Customs (HMRC) and not to the business.

Gross Profit

Gross profit is the amount of money shown after direct costs have been deducted from sales. The easiest way to explain this is: If you buy an item for £20 and sell it for £35 then you must deduct the initial cost of the item to your business which is £20.

Direct Costs

Direct costs are any cost incurred in the buying, shipping, or storing or any item you sell on to another individual and must be deducted from the cost of the sold item in order to arrive at a Gross Profit figure.

Indirect Costs

These are such costs as those of salaries and utilities such as telephone bills, rates and electricity bills. It is important to show all of these amounts in your profit and loss account as they will be charged to you including VAT.

Net Profit

Your net profit sum is the money that is left after all expenses have been paid. Once you have paid for the items you buy and sell, utilities, salaries, and any other amounts which need to be deducted at source, the figure you are left with is your net profit.

It is important when compiling your profit and loss accounts that you include the aforementioned.

Obviously - as we have said – there are many software packages available on the market that will create these accounts for you providing you enter the correct information but if you are in any doubt you should consult a qualified accountant.

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