The P&L account and Balance Sheet

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Introduction 

The P&L account and Balance Sheet are two of the main statements in the set of financial accounts for a UK company. Key to note, both of these are effectively financial reports for your small business. These reports are also known as the financial statements, and we will look at how the P&L (Profit and Loss account) and Balance sheet work. Please note that all small and large companies must file formal accounts with the UK authorities for each accounting period.

Your business will have a company `year-end.’ Please note that this is the date in the calendar year the accounts are `made up to.’ Therefore, if your company year-end is 31 December 2022, this is the `made up to’ date. Ordinarily, your company will need to file accounts every 12 months.

When you have your own UK company, there are two UK authorities that you will need to file your accounts. As mentioned, you will need to do this every 12 months, and these authorities are:

The P&L account and Balance Sheet -abbreviated accounts

Key to note, every year, an abbreviated version of the accounts needs filing with Companies House. Please be advised that we have a separate article showing all the company/personal tax filing requirements when you run your own business. The abbreviated accounts filed with Companies House show less information than the full version. To sum up, they only show the data required to comply with current requirements. Therefore, they do not include the profit and loss statement but contain the Balance Sheet. In contrast, the full accounts and business Tax Return (CT600) need filing with HMRC.

There are two key pages in a set of company annual accounts. First of all, there is the Profit and Loss Account. Next, there is the Balance Sheet, and we will now take a good look at these pages. Notably, both of them provide key information regarding your business’ finances. 

The two main pages in the company accounts 

The Profit and Loss account and Balance Sheet are the two main pages in a set of financial accounts. 

Profit and Loss account 

The Profit and Loss statement in a UK company’s set of annual accounts will show the business’ trading results. These will be for a period of time and will usually cover a year. In addition, the P&L account will also show how well the business has or has not done.

Please note that the P&L account is also known as the company’s income statement. In effect, this shows the company’s total revenues and expenses.

Revenues will include all income received by the company, be it from sales or turnover and other income. Meanwhile, a business’ operating expenses will include its administrative, selling and general expenses that are related to running the business for a period of time.

Therefore, the profit and loss statement UK will display the company’s activities during the year in terms of trading and other income and expenditure. To explain, here is an example of a P&L template for a financial year:

Profit and Loss account example
Turnover            50,000
Cost of sales or cost of goods sold –         15,000
Gross profit margin            35,000
Administrative expenses –         10,000
Other income                  500
Operating profit and profit before tax *            25,500
Corporation Tax –            4,845
Profit after tax -net profit            20,655 This is the amount available in the financial period to be paid as dividends.

* The operating profit is the total profits from a company’s business operations, excluding interest and tax deductions.

UK company Balance Sheet

The Balance Sheet displays the business’s financial health and shows the assets, liabilities and equity in the company. Therefore, let’s look at how to read a Balance Sheet.

Key to note, the Balance Sheet is a snapshot of the company’s total assets and liabilities as of the date that the accounts are made up to. This will include the balances owed to and by the business at the Balance Sheet date. Most importantly, it shows your company’s financial position at that point in time. The Balance Sheet also shows the shareholders’ equity and any retained profits (not yet distributed as dividends) that will be available the following year. Again, it is important to note that all of the values displayed on the Balance Sheet are those at the business year-end date.

As mentioned, the Balance Sheet provides a snapshot of a moment in time. To clarify, it shows where the company stands with its finances as the Balance Sheet date.

The Balance Sheet also shows how the business’ finances its assets, whether through shareholder’s equity or as debt under liabilities. In addition, it will also show how efficiently the company is using its resources.

When we look at how to read a Balance Sheet, the main components are:

  • Fixed assets.
  • Current assets.
  • Current liabilities.
  • Shareholders’ funds.

The main types of financial tags that appear in company accounts 

Fixed Assets

Fixed assets will generally include computer equipment, office equipment and motor vehicles. Please note that these are known as tangible assets. Furthermore, the Net Book Value of the fixed assets is shown on the Balance Sheet.

Included within fixed assets may be intangible assets. What’s more, these are assets that are not physical in nature. Please note that this will include goodwill, intellectual property, patents, trademarks, copywrites etc.

Current Assets

Please note that a company’s current assets will usually include:

  • The Company bank account balances. Included here is the total of all company bank accounts as at the Balance Sheet date.
  • The company’s receivables at the Balance Sheet date. These are also known as trade debtors. What’s more, these are the accounts receivable, showing the amounts owed to the company by its clients.
  • The value of any stock. Please take note that the stock will be listed at cost price.
  • Any other amounts that are owed to the company. Please note that these could include any loans, such as director’s loan accounts. These will show in the accounts as other debtors.

Cash flow statement

Companies can also include a cash flow statement in their accounts, after the Balance Sheet but before the notes to the accounts. Please note this statement details the exact amount of a company’s cash inflows and outflows over the financial period. Kindly note that many smaller companies include an income statement in their accounts; this is the most common financial cash flow type statement. In short, this will show a company’s revenues and total expenses, including noncash accounting, such as depreciation.

Current liabilities -creditors under and over one year 

A company’s current liabilities include all the amounts owed to third parties at the Balance Sheet date. Please note that this will consist of both short-term and long-term liabilities. The Balance Sheet will show separate totals for the creditors due under one year and over one year. Notably, the sum of these two amounts is the company’s total liabilities owed at the Balance Sheet date. Typically, creditors are made up of the following items:

  • The amounts that are owed to the tax offices. Please note that this will include amounts owed for Corporation Tax, VAT and PAYE/NIC.
  • Any bank loans and overdrafts that are owed. That is to say; this will include the balances owed per the banks as at the Balance Sheet date.
  • The amounts owed by the company to its suppliers. Notably, the official term for this is trade creditors. Kindly note that these are the accounts payable, and this shows the amounts owed by the company to its suppliers.
  • The amounts payable for any costs and expenses as at the year-end. Please note that this is called accruals.
  • Any other amounts owing by the company at the Balance Sheet date. This could include a company credit card or a director’s loan account.

The P&L account and Balance Sheet -shareholders’ Funds

The shareholders’ equity or funds represent the company’s assets minus its liabilities. These show the company’s net value/worth at the Balance Sheet date. Therefore, this is effectively the owner equity and is made up of the share capital, share premium account, and the company’s retained earnings.

The shareholder’s fund section on the Balance Sheet is key financial information. Effectively, this shows the value, when converted into cash, which would return to the shareholders if the company closed down. Please note that if this took place, the business would cease operations. As part of this, it would liquidate its assets, settle its liabilities, and then pay out all remaining funds to the shareholders.

In a typical contractor company, the shareholders’ equity is usually the sum of the share capital and the retained profit and loss account. Notably, the P&L account figure shows the business profits to date, which are still payable as dividends or as capital when the company closes down. 

Further thoughts 

What is the difference between the two key pages? 

The key differences between the two pages are:

  • The Profit and Loss account shows how well the business has done. Please note that this shows the business income and expenses. Moreover, it informs the reader if the company has made a profit or loss during the accounting year.
  • In contrast, the Balance Sheet shows you how much the company is worth. Therefore, it shows its actual value at the year-end date. Furthermore, it also shows all the amounts due to and from the company. Included in this are any long-term liabilities. 

How important are financial accounts for contractors?

To sum up, as a contractor with your own company, you must prepare and file your accounts with the official bodies by law each year. Furthermore, you are not likely to require them for any purpose other than sending them to Companies House and HMRC each year. Most important, the P&L account and Balance Sheet are the statements that show your business’ financial results and latest position.

However, if you apply for a mortgage, the provider may ask you to provide copies of your accounts to the lender. As a result, your accountant will typically help you to do this.

In contrast, for other businesses, accounts are important documents. Key to note, they show how well the business is performing. In conclusion, lenders and potential investors will use the accounts to show how well the directors manage the company in terms of its finances.

Today, accountants will produce a company’s financial accounts on accounting software. In addition, there is also now online accounting software to help maintain your company’s book-keeping, VAT reporting and payroll processing/reporting. 

Final thoughts

The Profit and loss account and Balance Sheet are two key statements in the year-end accounts. Notably, the mechanics of these are quite technical, but they may be of interest to you as a business owner. Your accountant will take care of the work when they prepare your accounts, and with your help, they will make sure that the accounts are correct. What’s more, as you can see, there are two key pages that will show how your business is doing financially. Finally, you can review the accounts, giving clues about where you can improve things.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: August 1st, 2022 / Categories: Running Your Own Company /

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