Profit and Loss
The Profit and Loss account is probably the financial statement that gets the most attention. At it’s simplest, it is merely a statement of income less expenditure – which hopefully still leaves a positive figure. If you are a plc (public limited company, who’s shares are traded on the stock exchange), the Companies Act lays down the exact format and rules that need to be followed.
Exemptions for Small and Medium sized limited companies
Small limited companies, as defined by Companies House, do not have to file a Profit and Loss Account at all. Medium sized companies may file an abbreviated Profit and Loss Account.
There is no statutory requirement for sole traders to produce a profit and loss account. However, a professionally prepared Profit and Loss Account helps to impress the bank manager and people you may need to persuade in the course of your business.
In the Profit and Loss Account, turnover is the income you generate through your sales. (Investment income, which will be the subject of a future blog, is dealt with elsewhere)
Cost of Sales
This is basically all the direct expenditure incurred in generating your sales. Therefore, the cost of stock and raw materials will be included here.
Gross Profit or Loss
Turnover less Cost of Sales gives the Gross Profit or Loss
Distribution and Administrative Expenses
As the name suggest, this is the cost of transporting your product to your customers
This includes expenditure on head office premises, administrative staff and overheads.
It is frequently impossible to categorise an item of expenditure as purely distribution or purely administrative. When this is the case (for any item, not just distribution or admin expenditure), an apportionment of the expense across headings is allowed. This is a very common occurence. The basis for the apportionment calculation will vary depending on what the expenditure is and can be very straight forward or incredibly long-winded. Indeed, for some accountants, in bigger companies, deciding on and making these apportionments can be the bulk of their full time job.
Investment, Tax and Extraordinary Items
The various types of investment income can be broken down into three main headings:
- Income from shares
- Income from other fixed assets (for example, property)
If there are any losses or interest payable, these are then deducted (but they are shown separately on the face of the Profit and Loss Account as opposed to being hidden away in a note to the accounts)
The amount of tax due on ordinary activities (which are all the items so far listed in the Profit and Loss account but excluding extraordinary items).
Extraordinary Income and Charges
Extraordinary items in the accounts are quite rare. The definition of an extraordinary item is that it is “…outside the ordinary activities of the company…” But most things a company does, is related to it’s ordinary activities. Even if you sell off a division of your company, this is not classed as an extraordinary item.
Exception income and expenditure relate to the ordinary activities of a company, but they are exceptional because the amounts of money involved are very large.
A balance sheet is divided into two halves, with either:
- the capital and liabilities in one half and assets in the other; or
- capital in one half and net assets in the other.
The balance sheet may be presented horizontally or vertically. In either case, both halves must add up to the same total.
However, a balance sheet is not so named because it balances (although, obviously it should), but because it is a statement of the outstanding balances on the ledger accounts for the capital, assets and liabilities.
The Companies Act 1985 prescribes the format that limited companies have to follow. Small limited companies are able to file an abbreviated balance sheet at Companies House.
Capital is the amount of money that the owners have put into the business. Capital is also referred to as a liability. This is because capital is the debt that the business owes to its owners.
In the case of a limited company, the capital will be in the form of shares. When a limited company needs to raise more capital, it has to issue more shares.