Profit and Loss Account (P&L)
A profit and loss account (P&L) shows a business' trading results over a given period of time, eg weekly, monthly or yearly. It is different from a balance sheet, which shows how a business is performing at a specific point in time. Limited companies are obliged by law to produce a P&L every year; sole traders and partnerships do not have to disclose this information.
A typical P&L for a sole trader or partnership contains the following information:
Example of a sole trader's P&L account
- Sales - all sales must be recorded immediately on the P&L, eventhough you might not receive the cash for 30 or 60 days, or even longer.
- Direct Costs - sometimes known as cost of sales, are the costs that can be directly attributed to the production of your particular product or service, eg raw materials, direct labour and sub-contract costs, etc.
- Gross Profit - to work this out you simply subtract the direct costs from the sales.
- Overheads - these include rent and rates, utilities, wages, insurance, telephone bills and advertising costs. Only record the costs incurred and paid for at the time of preparing the P&L, eg the wages you have paid up to that particular point and not the total annual salary.
- Net Profits - this is worked out by subtracting the overheads from the gross profit figure.
- Drawings - this is the amount you take out of the business for your own wages.
- Retained Profits - this is money that you leave within the business for possible future expenditure, etc.
Note: a P&L for a limited company would show the dividend for shareholders.