Understanding your numbers part 1 – what is the profit and loss account?

Author: Russell Smith
April 7, 2012

I thought I would write a short series of blogs on the basics of understanding your numbers in your business.

I always think that business owners need more help from their accountants in helping them understand what their numbers are and what they mean for the future of the business. You don’t have to be an accountant to understand your numbers as long as you have a great accountant along side to help you. So, if you don’t have a great accountant, hopefully some of these blog posts will help fill in the gaps.

In a set of accounts, the profit and loss account is perhaps the easiest of the financial statements to understand. Quite simply it is all your income minus all your expenses which equals your profit. So far, so easy but here are a few things to watch out for in a profit and loss account:

1. The income and expenses are recorded when they have been invoiced NOT when they have been paid i.e. you can have £1 million on the sales line but only be paid half of it (sales invoices are just paper until they have been paid)

2. The income and expenses do not include VAT.

3. You can have income or expenses that haven’t been invoiced yet (i.e. where you know work has been done or a bill is due, just because you haven’t actually invoiced it or been invoiced, you can still include it – this is called accruals)

4. The one expense that isn’t included is capital expenditure (items such as computers, fixtures, property – these are assets that go on the balance sheet and are depreciated over time – the cost of this will sit in the ‘depreciation’ line on the profit and loss account)

5. The profit is the key number, not just because it shows the performance of your business but it is the number that you are taxed on

Tomorrow….Easter Sunday! But if you want to know what a balance sheet is – stay tuned!

 

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