The Profit & Loss Account

See Below for the example table:

A ‘Note’ in the Profit and Loss (or Balance Sheet) gives a breakdown of the amount stated in a particular line. The Notes to the Accounts are part of the published accounts of a company: i.e.

Guidance Notes

Turnover (1)

This is the total value of invoiced products or service’s supplied, less vat, and trade discounts over a one year period. The words ‘Turnover’ and ‘Sales’ would mean the same.

Cost of Sales (2, 3, 4 and 5)

This is the direct cost of goods or services sold. All other goods left at the end of the accounting period are entered as ‘Stock’ in the Balance Sheet. If you were a house builder, bricks, wood and glass would be direct costs within ‘Materials’. As would the wages for the brick layer, joiner and glassier be direct costs within ‘Wages’. The cost of advertising the houses would not be a direct cost as advertising is not part of the building/manufacturing/production cycle. The same applies to wages for the administration staff.

Gross Profit (6)

This figure is the total amount of profit on all sales after deducting the direct cost of making the goods or supplying the service. Expenses, tax and interest are yet to be deducted.

Distribution (7)

This area covers postal and vehicle distribution, wages for sales and marketing staff, agent commissions, sales outlets and anything that is clearly involved with sales promotion.

Expenses (11, 12 and 13)

All costs outside of (3) and (8) are listed here. Again, as with all costs in the P& L, figures exclude vat. Most of the expenses are self explanatory, however, depreciation is not so straight forward. Deprecation is the reduction in value of a fixed asset. Lets look at a production machine with a working life of five years. The reduction in value would be as follows:

• Machine purchased 1996 with a value of £5,000 and no scrap value
  • Depreciation at 20% Per Annum £1,000 1999 Worth £4,000
  • Depreciation at 20% Per Annum £1,000 2000 Worth £3,000
  • Depreciation at 20% Per Annum £1,000 2001 Worth £2,000
  • Depreciation at 20% Per Annum £1,000 2002 Worth £1,000
  • Depreciation at 20% Per Annum £1,000 2003 Worth £0

When you buy a new machine the purchase value is added to the fixed asset column in the Balance Sheet. At the end of each year the value of the machine reduces the fixed asset amount in the Balance Sheet. For an equal five year period a compensating entry is needed in the P&L (this is ‘double entry’ bookkeeping). It is very similar to a write off entry.

Net Profit Before Tax (14)

This figure is the profit resulting from all sales in the period. Corporation Tax @ 20% (or whatever the current rate if different) has to be deducted from this amount for a true figure.

Relevant Articles

• The Balance Sheet
• The Cash Flow Forecast
• Cash Budget