Understand Your Business

A profit and loss account is a summary of business transactions for a given period - normally 12 months. By deducting total expenditure from total income, it shows on the 'bottom line' whether your business made a profit or loss at the end of that period.

A profit and loss account shows owners, shareholders or potential investors how the business is performing. Most of the information is also used by HM Revenue & Customs to check your tax calculations.

 

 

By law, if your business is a limited company or a partnership whose members are limited , you must produce a profit and loss account for each financial year.

For example, if your business is a limited company, the company will report its profit (or loss) through annual accounts and a Corporation Tax return. You also need to report your own personal income from the business, for example as a company director, on your Self Assessment tax return.

If your business is a partnership, the nominated partner must complete a Self Assessment tax return for the partnership. In addition, you need to report your own personal income from the business on your own Self Assessment tax return.

Self-employed sole traders and most partnerships don't need to create a formal profit and loss account - but they do need to keep adequate records to complete their Self Assessment tax return fully and accurately.

Key benefits to producing formal accounts are;

if you are looking to grow your business
or need a loan or mortgage, as most institutions will ask to see three years' accounts.
Profit and loss reporting requirements vary. Whatever your business type, you must keep accurate records of your income and expenditure. You need to keep self-employment records for five years after the 31 January deadline - and you may need to keep them for longer if you file your return late or if HM Revenue & Customs starts a check. You need to keep limited company or partnership records for six years after the latest date your tax return is due.

The basic records you will need to keep are:

a record of all your sales and takings
a record of all your purchases and expenses
a separate list for petty cash expenditure if relevant
a record of goods taken for personal use and payments to the business for these
a record of money taken out for personal use or paid in from personal funds - this applies to limited companies
back-up documents for all of the above
You will need the information above to create your profit and loss account and to complete your tax returns.

This can all very time consuming and complicated let Irvine Accounting deal with this for you.

The Importance Of Management Accounts

Management accounts - are aimed at helping you to plan your business and make decisions about key areas such as sales, margins and stock. They can help you make timely and meaningful management decisions about your business. Different businesses will have different management accounting needs, depending on the business areas that are important to them. These include:

the sales process - such as pricing, distribution and debtors
the purchasing process - such as stock records and creditors
a fixed asset register - details of all fixed assets, including identification numbers, cost and date of purchase, etc
employee records

There’s no legal requirement to prepare management accounts, but it is hard to run a business effectively without them. Most companies produce them regularly - eg monthly or quarterly.