This will be the first in a series of blogs about company accounts. Future topics will include the balance sheet, accruals basis accounting, and work in progress.
A company’s Profit and Loss, or Income Statement, is a financial report which shows a summary of the company’s income, expenditure, and profit or loss for a given period.
Turnover is the amount of income received by the business for the sale of products or services to customers. This is usually net of VAT. Where sales are invoiced this will be the total of sales invoices less any credit notes raised in the period.
Cost of sales includes the costs used to create the product or service which is sold to customers. This usually includes the purchase of materials and direct labour costs. For a manufacturing company, the cost will increase in line with turnover, as the more products that are sold, the more resources will be needed to make the product or service.
Gross profit is turnover less cost of sales. Gross profit can be used to work out the gross profit margin (gross profit divided by turnover) which can be a better indication of the business’s performance, and allows us to benchmark your performance against the industry as a whole.
Administrative expenses comprise the overhead costs of the business. This can better be split into: premises costs, office expenses, motor expenses, general expenses, professional fees, and depreciation. These are more likely to be fixed costs such as rent and electric which don’t generally vary with turnover.
Operating profit is the total profit from the operations of the business (before interest and tax).
Bank or similar interest receivable or payable will include any interest you pay on loans and overdrafts together with any interest on a hire purchase asset. This is followed by profit before tax.
Taxation is made up of corporation tax and movement in deferred tax where applicable, so might not equal the amount owing to HMRC. Deferred tax is just a provision for tax you may have to pay in the future. It is only the corporation tax that is payable to HMRC.
Finally we have the total profit of the business for the period. This is usually the amount of distributable profit for the year which can then be paid as dividends.
Any dividends payable will be shown after profit, followed by a summary of the retained earnings at the start and end of the period. Retained earnings are simply the total of profits retained in the company (ie total profits less dividends taken).
You should note that it may not be the case that all reserves are distributable, as certain elements such as upwards property revaluations aren’t able to be taken as dividends.