Well, basically, it shows your sales and expenditure for the period. Usually for a year you’ll add up all your sales and all of your expenses.
Those expenses will be categorised under different headings, whether that’s office expenses, purchasing goods, so you can actually see where the money’s gone. And at the bottom it will show you whether you’ve made a profit or a loss for the year.
Think of your Profit and Loss account a bit like a movie because it is moving. It’s over a period of time. So, for example, from the 1st of January to the 31st December, and it showed you everything that happened during that time.
What do I need to know?
One thing that you do need to be aware of with the Profit and Loss account is that some of it can be theory rather than fact.
That’s because you get to decide on some of the accounting assumptions that are made on how much of an expense is put into the Profit and Loss account in a given year.
The main example of that would be is if you buy an asset, let’s say you buy some plant and machinery for £20,000 pounds, you do get to choose in your Profit and Loss account how much you put in each year.
If you think that plants can only last you one year you put the £20,000 pounds in. If it’s going to last you five years, you put £4,000 pounds in a year.
So, you just need to be aware when you’re looking at Profit and Loss account of some of these assumptions that have been made.
Do you have to make a profit as a business?
Well, it’s preferable and certainly long term, you do need to make a profit.
And that’s one of the reasons you should keep on looking at your Profit and Loss account on a regular basis, not just once a year, but preferably monthly.
If you would like any more information, please get in touch.