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What is a Profit & Loss Account?

The Profit & Loss account is a statement which shows the profit or loss of the business. It also includes a financial summary of how this has occurred. It usually tracks one year of performance but will include last years figures for a comparison to be drawn.

The significance of a profit & loss account for freelancers, contractors and small businesses is generally the same. Allowing you to identify performances, analyse the date and build on it.

Year on year, the profit & loss account enables you to see differences and track levels of sales and turnover. This will allow you to measure against the product or services that you have sold. It also contains the levels of overheads (inc. salaries, property costs and other).

Creating the profit & loss account enables accurate projections, analyse performance. Therefore, it can be used to effectively grow your business.

How to Prepare a Profit & Loss Account?

The first step should be to have clear records of your business bank account. Make sure all incoming cash and outgoings are correct. The cash received will typically refer to sales invoices paid and expenses will relate to costs incurred by the business to help generate sales and overheads.

A Profit & Loss Account is made up of the following figures:

  • Your net sales
  • The cost of goods sold
  • Selling and administration expenses
  • Other Income
  • Other Expense