The Profit and Loss account and Balance Sheet

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Introduction -the Profit and loss account and Balance Sheet (UK) 

When you run your own company, the contractor Profit and Loss (P&L) account and Balance Sheet are two of the main statements in a set of financial accounts. Indeed, the company accounts Balance Sheet and P&L account are financial reports for your UK contracting business. Basically, the Profit & Loss account shows a company’s trading results while the UK company Balance Sheet summarises all assets and liabilities and the overall value of your contracting business. What’s more, a business may refer to these official reports as their financial statements or UK company financials. In this guide, we’ll look at limited company accounts explained for UK contractors. As part of this, we’ll investigate the P&L (Profit and Loss account sheet) and UK contractor Balance sheet. Furthermore, we’ll research how to read a Balance Sheet (UK) and how the P&L account works.

In this guide, we’ll explain how both key documents work and what they show. We’ll research Profit and Loss vs Balance Sheet of a company in detail and research the purpose of a profit and loss account of a company. What’s more, we’ll pay focus on understanding a Balance Sheet (UK). In addition, we’ll show a contractor Profit and Loss and Balance Sheet example and look at how this works. Furthermore, we’ll also look at a UK contractor accounts template and the overall difference between Profit and Loss account and Balance Sheet.

Initial thoughts 

First thoughts 

In the UK, all small and large companies file formal accounts with the authorities for each accounting period. Furthermore, they usually file accounts with the UK authorities every twelve months. When you’re a UK company owner, your business will have a company `year-end’. This is the date in the calendar year which the accounts are `made up to.’ Therefore, if your company year-end is 31 December 2023, this is the date up to which you include transactions in the accounts made up to this date. When we consider the Balance Sheets and Profit and Loss accounts for any UK business, they contain key information on how well the business is doing.

Company Profit and loss account and Balance Sheet & annual filing requirements

When you have your own UK contracting company, there’s two UK authorities which you’ll need to file your contractor’s accounts with. What’s more, these are government organisations who are responsible for collecting such data and collecting company tax. To clarify, limited company contractors must do this on an annual basis. Therefore, the two UK authorities are:

  • Companies House. Indeed, this government body is responsible for official company filings in terms of company official details. What’s more, UK companies file annual accounts and Confirmation Statements with Companies House.
  • HM Revenue & Customs (HMRC). This government body are responsible for collecting company tax. Also, UK companies file company accounts and a company tax return with HMRC on an annual basis.

When you’re a contractor in the UK, your accountant will take care of you and your company. What’s more, when it comes to the accounts including the P&L, contractors will usually rely on their accountants to handle this. Therefore, in most cases, the accountant will prepare the P&L & Balance Sheet, business accounts and various tax returns. Furthermore, they’ll also do the necessary filing with the UK authorities detailed above.

Companies House Abbreviated accounts 

Every year, small companies file an abbreviated version of their full accounts with Companies House. These are your Companies House financial reports and they display online as part of the public record for your business. The abbreviated accounts are a shorter version from the full accounts, with less pages and less notes to the accounts. Some business owners will ask do you have to file profit and loss to Companies House? The response to this is when a small company prepares accounts for its members, it has the option not to file the profit and loss sheet and/or the directors’ report with Companies House.

Therefore, the abbreviated accounts for a company need to show the relevant data to comply with current Companies House reporting requirements. Also, a contractor company’s abbreviated accounts don’t include the profit and loss statement but do contain the Balance Sheet. In addition, the full business accounts, and company Tax Return (CT600) need filing with HMRC.

There are two key pages in a set of company annual accounts. First, there’s the P&L account. Next, there’s the UK Balance Sheet of a company and we’ll now take a good look at these pages. The Profit & Loss Account and Balance Sheet provide key information regarding your business’ finances. What’s more, the Profit and Loss & Balance Sheet contain key data which shows how well your business is doing in terms of profit and liquidity. On this website, we have a separate guide which shows all the company/personal tax filing requirements when you run your own business. This is a useful read and you can use it to track important dates. To summarise, when we look at the abbreviated accounts which we file with Companies House, they show less information than the full version. 

Common questions

As a contractor and business owner, you may have questions about your annual accounts. This may especially be the case if you’re a new business owner. Examples of such questions on your accounts and Balance Sheet & Profit and Loss account of a company could include:

  • What is the purpose of Profit and Loss account?
  • How to read company accounts?
  • What is a Profit and Loss account?
  • What is P&L account?
  • How to do a profit and loss statement?
  • How to do a trading profit and loss account?
  • Why do we prepare Profit and Loss account?
  • What is a Balance Sheet?
  • How to read a Balance Sheet?
  • How to read Companies House accounts? 

In this guide, we’ll look at these questions and find out how the business Profit and Loss account and Balance Sheets work for UK contractors. 

The Profit and loss account and Balance Sheet –two main pages in the company accounts 

The Profit and Loss and Balance Sheet of a company are the two main pages in a set of financial accounts. Certainly, the information that’s shown in the business Profit & Loss statement and Balance Sheet is key for the company in question. This is because the Profit & Loss & Balance Sheet show the company’s profitability as well as the health of the business. In short, the Balance Sheet and Profit and Loss account are very important for a UK limited company in any industry. Therefore, we’ll summarise an example P&L and Balance Sheet a bit later in this guide. 

Profit and loss account for a company

P&L a/c explained

Let’s now look at the profit and loss account explained for a UK limited company. The Profit and Loss statement for an independent contractor in a UK company’s set of annual accounts will show the business’ trading results. In addition, when we consider P&L accounting, the official report covers the results for a period of time, and it’ll usually cover a year. Furthermore, Profit and Loss sheets show how well the business has or has not done.

The contractor P&L sheet is also known as the company’s contractor income statement. In effect, this shows the company’s total revenues and expenses.

Now, let’s consider how to do Profit and Loss account for a UK business? For example, business revenues will include all income received by the company, be it from sales or turnover and other income. On the other hand, a business’ operating expenses will include its administrative, selling, and general expenses which relate to running the business. To sum up, the figures in question for both revenue and costs, will cover a financial period which is usually a year.

Company Profit and Loss account (UK) example
Turnover 50,000
Cost of sales or cost of goods sold -15,000
Gross profit 35,000
Administrative expenses -10,000
Other income 500
Operating profit and profit before tax * 25,500
Corporation Tax -4,845
Profit after tax (or net income) 20,655 These are the funds in the company after taxes. What’s more, the company can pay dividends out of this in the future.

Summary of the above

* Within the Profit and Loss statement for small business, the operating profit is the total profits from a company’s business operations. What’s more, this P & L template excludes interest and tax deductions.

This business Profit and Loss account example (UK) shows what information the basic statement contains. Indeed, this’ll be pretty much the same for all UK companies especially smaller companies such as for a UK contractor. This Profit and Loss account template shows the main items in a P&L and in this P&L example, we show how we arrive at the profit after tax figure at the end of this.

Balance Sheet explained (UK)

Limited company Balance Sheet

Let’s now look at the Companies House balance sheet explained for a UK limited company. A Balance Sheet (UK) displays the business’s financial health and shows the assets, liabilities, and equity in the company. This is also known as the Statement of Financial Position of a business, and it shows the company’s overall financial position at a given date. Therefore, let’s research how to read a Balance Sheet (UK).

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. Most importantly, when we research the construction of a Balance Sheet, it’ll include the balances owed to and by the business, at the date of the statement. Most importantly, it shows your company’s financial position at that point in time. In conclusion, the financial position shows the health of the business in monetary terms.

UK Balance Sheets also show the shareholders’ equity and any retained profits (not yet distributed as dividends) that’ll be available the following year. To re-iterate, it’s important to be aware that all the values displayed are those at the business year-end date. As mentioned, the Statement of Financial Position provides a snapshot of a moment in time. Therefore, it shows where the company stands with its finances at the date the statement is made up to.

The Statement of Financial Position also shows how the business’ finances its assets, whether through shareholder’s equity or as debt under liabilities. In addition, it’ll also show how efficiently the company is using its resources.

In addition to explaining how the P&L account functions, when we look at how to read a Balance Sheet (UK), the main components are:

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

What does a Balance Sheet (UK) show? 

The Balance Sheet for small business shows the amounts due to and from the company at the statement date. In addition, it shows any assets and how the company is financed (capital and reserves). In this guide, we’ll look at a Balance Sheet example (UK) below and see how this works. What’s more, a contractor Balance Sheet will show the amounts due to and from their company at the Balance Sheet date as well as assets, bank account and the capital and reserves (shareholders’ funds).

To explain further, here’s a Balance Sheet template (UK) for a financial year:

ABC Consulting Limited 30 June 2023
Fixed assets
Tangible assets 2500
Current assets
Debtors 6000
Cash at bank 7500
13500
Creditors
Amounts falling due within one year 4500
Net current assets 9000
Total assets less the current liabilities 11500
Capital and reserves
Called up share capital 100
Retained earnings (retained P & L account) 11400
Total shareholders’ funds 11500

This Balance Sheet template for small business shows how we construct a UK Balance Sheet. What’s more, the small business Balance Sheet template shows the figures that we include in this. In addition, this UK Balance Sheet example shows how we arrive at the `Total assets less the current liabilities’ which in turn, equal the overall shareholders’ funds.

Contractor Balance Sheet

As a UK limited company contractor, the company balances above could represent:

  • The tangible assets could be your company equipment. Indeed, this could include computer or office equipment.
  • Debtors amounts falling due (within one year) will usually include invoices owed to the company. Therefore, this could be for your contract work for the last month in your company accounts that hasn’t been received by the company year end.
  • Cash at bank are the balances in your contractor bank accounts. Therefore, this’ll include the current account balance and any savings or deposits account balances.
  • Creditors amounts falling within one year represents amounts owed by your company. Indeed, creditors amount falling due under one year includes Corporation Tax, VAT, PAYE/NIC and any creditor balance on your director’s loan account.
  • Called up share capital represents the shares issued by the company. Therefore, as a contractor this is your shares and the shares held by any other shareholder.
  • The retained earnings are effectively the cumulative company profit and Loss account on Balance Sheet. Indeed, this Profit and Loss in Balance Sheet figure is the company funds which haven’t been distributed yet. In the case of a UK contractor, profit in Balance Sheet is the amount which’ll be available to pay to your company shareholders in the future. Depending on previous results, the cumulative P&L balance could show a loss in Balance Sheet of a company. In this case, the Profit and Loss account in Balance Sheet will show that the company is in negative equity.

Cash flow statement

In addition to the P&L and Balance Sheet, companies can include a cash flow statement in their accounts, after the Statement of Financial Position but before the notes to the accounts. What’s more, this statement details the exact amount of a company’s cash inflows and outflows over the financial period.

Additionally, many smaller companies include an income statement in their accounts. To clarify, this is the most common type of financial cash flow type statement. In short, this’ll show a company’s revenues and total expenses, including noncash accounting, such as depreciation. 

The Profit and loss account & Balance Sheet -the main finance categories in company accounts 

Fixed Assets

Fixed assets generally include computer equipment, office equipment and motor vehicles. What’s more, these are known as tangible assets. Furthermore, the Net Book Value of the fixed assets is shown on the Balance Sheet of a company.

Included within fixed assets may be intangible assets. These are assets that aren’t physical in nature. To clarify, this’ll include goodwill, intellectual property, patents, trademarks, copywrites etc.

Current Assets

A company’s current assets includes various types of business assets. What’s more, these’ll usually include:

  • The Company bank account balances. Basically, included here is the total of all company bank accounts as of the statement date. Furthermore, this’ll include the balance of the company current account as well as the balances on any company savings accounts.
  • The company’s receivables at the statement date. Indeed, these are also known as trade debtors. In other words, these are the accounts receivable, showing the amounts owed to the company by its clients.
  • The value of any stock that’s held by the company. Most importantly, the stock is listed at the cost price.
  • Any other amounts that are owed to the company. Basically, these could include any loans, such as director’s loan accounts. In addition, these’ll show in the accounts as other debtors.

Current liabilities -creditors under and over one year 

A company’s current liabilities includes all amounts owed to third parties on the Statement of Financial Position. Furthermore, this’ll consist of both short-term and long-term debts and liabilities. In addition, the statement shows separate totals for the creditors due under one year and over one year. Basically, the sum of these two amounts is the company’s total liabilities owed at the statement date. Typically, creditors are made up of the following items:

  • The amounts owed to the tax offices. To clarify, this’ll include amounts owed for Corporation Tax, VAT and PAYE/NIC.
  • Any bank loans and overdrafts. Therefore, this’ll include the balances owed per the banks as of the statement date.
  • The amounts owed by the company to its suppliers. Indeed, the official term for this is trade creditors. What’s more, 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. To explain further, these are called accruals.
  • Any other amounts owing by the company at the statement date. For instance, this could include a company credit card or a director’s loan account.

The Profit & Loss and Balance Sheet -Shareholders’ Funds

The shareholders’ equity or funds represent the company’s assets minus its liabilities. What’s more, 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 Statement of Financial Position is key financial information. Effectively, this shows the value, when converted into cash, which would return to the shareholders if the company closes. Indeed, if this took place, the business would cease operations. As part of this, it would liquidate its assets, settle its liabilities, and pay out all remaining funds to the shareholders.

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

Other considerations 

Further thoughts regarding the Profit and loss account and Balance Sheet of a company

What’s the difference between P&L and Balance Sheet of a company? 

When we consider P&L vs Balance Sheet, the key differences between the two pages are:

  • The company Profit and Loss statement shows how well the business has done. To sum up, 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 how much the company is worth. Therefore, this 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.

Therefore, the Balance Sheet and P&L difference in the main is that the latter shows your trading results for the year in question. The former shows all balances owed by and to the business and overall retained profit (or loss). 

Profit and loss account and Balance Sheet -how important are financial accounts for UK 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’re not likely to require them for any purpose other than sending them to Companies House and HMRC each year. Most important, the P&L 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. However, why are Profit and Loss accounts important and why are Balance Sheets important? To sum up, the Profit and Loss account of a company show how well the business is performing in terms of its activities. In addition, the Balance Sheet shows the business’ financial health. 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’s now online accounting software available for UK businesses. Most importantly, this helps maintain your company’s book-keeping, VAT reporting and payroll processing/reporting.

Self-employed contractors

It may be the case you are reading this and are self-employed. In that case, this HMRC example shows how to carry the figures from your accounts into your Self-Assessment tax return. 

Final thoughts

The contractor P&L account and Balance Sheet are two key statements in your UK contracting company year-end accounts. In our guide, we show Profit and Loss account and Balance Sheet examples, and this explains how both reports work. We also show the relationship between P&L and Balance Sheet whereby the overall P&L total feeds into the retained earnings in the Balance Sheet each year. For a non-accountant, the mechanics of company accounts are quite technical, but they may be of interest to you as a business owner.

Most importantly, your contractor accountant will usually take care of the company reporting work, when they prepare your annual accounts. In addition, with your help they’ll make sure that the accounts are correct and accurate. As you can see in our guide. There’s two key pages that’ll show how well your business is doing financially. Finally, on a periodic basis, you can review your business accounts, and this’ll give clues about where you can improve things for the future.

Link to Contractor Advice UK group on

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

Published On: January 4th, 2024 / Categories: Running Your Own Company /

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