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How to complete a profit and loss statement for your small business

Businessman calculating profit and loss

Completing a profit and loss statement is a legal requirement for limited companies, and gives you an indication of the health of your business.

Read on for some profit and loss account examples and tips on how to complete one for your business.

What is a profit and loss statement?

Also known as a profit and loss account or P&L, a profit and loss statement calculates your business’s net profit or loss for a period of time.

A profit and loss account can give owners a sense of their business’s finances, helping them to identify inefficiencies and potential improvements.

A company’s P&L is complemented by its balance sheet and cash flow statement to give an overall picture of how it’s performing.

Business owners often use a profit and loss account to identify:

  • seasonal trends through year-on-year and quarterly comparisons
  • the most profitable parts of their business and how to maintain them
  • what’s causing losses and how to reduce them

It could also help a business to get investment such as crowdfunding or venture capital funding.

Read our guide on how to calculate profit margin for more information on the difference between gross profit and net profit.

Do all businesses need a profit and loss account?

If you own a limited company, you’ll need to create a profit and loss statement for HMRC each financial year.

Sole traders aren’t required by law to create a P&L, but will give most of the same information when completing their Self Assessment tax return.

Regardless of their structure, most businesses produce a profit and loss statement each quarter and at the end of each financial year.

What’s the difference between a profit and loss statement and a balance sheet?

A profit and loss sheet shows the financial position of your business over a period of time, such as a month, a quarter, or a year.

It gives you a clear picture of your company’s income and expenses, plus whether you’re making profit or losing money.

A P&L shows the demand for your product or service, set against all the costs you incur to provide it.

On the other hand, a balance sheet shows how your business is performing at a particular moment, and how effectively you’re using your resources.

A balance sheet outlines details such as:

  • your financial risks
  • assets and liabilities
  • shareholders’ equity
  • how easy it is for you to access money

Read more about how balance sheets work and download our free balance sheet template.

How do you work out a profit and loss account?

When completing a profit and loss statement, you’ll need to keep a record of:

  • gross income – all the money you make from sales
  • cost of sales (or direct costs) – such as delivery or stock costs
  • overheads (or operating expenses) – such as wages, marketing, and rent
  • tax you need to pay

Once you have these details for the period you’re measuring, you’ll need to subtract your costs, overheads, and tax from your gross income to calculate a net profit or loss.

You can work out your P&L on a basic spreadsheet, but most basic accounting systems will include a profit and loss account. Read our guides to the best accounting software and bookkeeping for small businesses to get started.

Profit and loss account example

Here’s an example of a profit and loss account for a business over a three-month period:

  • your business makes £15,000 worth of sales
  • the cost of your sales, including delivery and packaging, is £3,000
  • the cost of your overheads, including renting your premises and paying wages, is £4,500
  • this leaves you with a gross profit of £7,500
  • your tax costs for the three months add up to £1,375
  • this means your net profit for this period is £6,125

Remember, most tax and accounting software will be able to work this out for you as long as you keep accurate records.

Getting your accounts right is crucial for business owners, so make sure you speak to a professional accountant or business finance expert if you’re not sure of anything.

Profit and loss template

Using a simple profit and loss account template can help you to work out your business’s P&L for any time period.

Zoho Finance has a profit and loss template that your business can use to work out how much money you’re making, profit margins, and how costs are affecting your income.

Business guides to help you manage your finances

Read our guides on accounting and reporting for more tips on how to run your business smoothly:

Do you have any unanswered questions about completing a profit and loss account for your business? Let us know in the comments below.

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Conor Shilling

Conor Shilling is a professional writer with over 10 years’ experience across the property, small business, and insurance sectors. A trained journalist, Conor’s previous experience includes writing for several leading online property trade publications. Conor has worked at Simply Business as a Copywriter for three years, specialising in the buy-to-let market, landlords, and small business finance.

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