Introduction -the Profit and loss account and Balance Sheet (UK)
As a UK limited company contractor, it is worth noting the contractor Profit and Loss (P&L) account and Balance Sheet are two of the main statements in the set of financial accounts for a UK contractor company. Indeed, both are financial reports for your UK contracting business. What’s more, these reports are also known as the financial statements of a UK company. Therefore, in this article, we will look at the P&L (Profit and Loss account) and UK contractor Balance sheet. In particular, we will investigate how to read a Balance Sheet (UK) and how the P&L account works.
In the UK, all small and large companies must file formal accounts with the authorities for each accounting period. Furthermore, accounts are usually filed every twelve months. In addition, your business will have a company `year-end’ and 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 `made up to’ date.
In this guide, we will explain in detail how both documents work and what they show. In addition, we will show a contractor Profit and Loss and Balance Sheet example and look at how this works. Furthermore, we will also look at a UK contractor accounts template.
The Profit and loss account and Balance Sheet -company annual filing
When you have your own UK contracting company, there are two UK authorities that you will 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 have to 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 details. In addition, UK companies file annual accounts and Confirmation Statements with Companies House.
- HM Revenue & Customs (HMRC). Certainly, this government body are responsible for collecting company tax. In addition, UK companies file company accounts and a company tax return with HMRC on an annual basis.
When you are 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 accounts and various tax returns. Furthermore, they will also do the necessary filings with the UK authorities detailed above.
Every year, an abbreviated version of the accounts needs filing with Companies House. What’s more, we have a separate article showing all the company/personal tax filing requirements when you run your own business. The abbreviated accounts which we file with Companies House show less information than the full version.
Some will ask, do you have to file profit and loss to Companies House? Basically, when a small company prepares accounts for its members, it has the option not to file the profit and loss account and/or the directors’ report with Companies House. To sum up, it only has to show the data required to comply with current requirements. Therefore, they do not include the profit and loss statement but do contain the Balance Sheet. In contrast, the full accounts and business Tax Return (CT600) need to be filed with HMRC.
There are two key pages in a set of company annual accounts. First, there is the P&L account. Next, there is the UK Balance Sheet, and we will now take a good look at these pages. In addition, both of these pages provide key information regarding your business’ finances.
The Profit and loss account and Balance Sheet –two main pages in the company accounts
The Profit and Loss and Balance Sheet are the two main pages in a set of financial accounts. Certainly, the information that is shown in these two pages is key for the company in question. This is because it shows the company’s profitability as well as the health of the business. In short, the two documents are very important for a UK limited company in any industry. Therefore, we will summarise an example P&L and Balance Sheet a bit later in this guide.
Profit and loss account
Let’s now take a 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, these reports will be for a period of time and this will usually cover a year. Furthermore, Profit and Loss sheets will also 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 that are related to running the business. To sum up, the figures in question for both revenue and costs, will cover a financial period.
What does Profit and Loss account show?
The business Profit and Loss Statement (UK) will display the company’s activities during the year in terms of trading and other income and expenditure. Indeed, a Profit and Loss statement for contractors will show their contracting income. In addition, it will also show any direct costs and administration costs for the business. What’s more, in a UK contractor company, these will include travelling costs, office expenses, computer costs, accountancy fees and salaries to name but a few. Furthermore, the contractor Profit and Loss statement will show the Corporation tax charge and the profit after tax. What’s more, the profit after tax shown in the P&L account is the amount of profit for the year that is available to be paid as dividends.
To explain further, we will now set out a Profit and Loss template (UK) for a financial year. Basically, this contractor profit and loss statement sample shows the main figures which appear in a standard P&L.
|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, dividends can be paid out of this in the future. |
* 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 excludes interest and tax deductions.
This Profit and Loss account example shows what information the basic statement contains. This will be pretty much the same for all UK companies especially smaller companies such as for a UK contractor.
Balance Sheet explained (UK) for a contractor limited company
Let’s now take a 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 us look at 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, this will 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 will be available the following year. To re-iterate, it is important to be aware that all of 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 that 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 will 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:
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 also shows any assets and how the company is financed (capital and reserves). In this article, we will 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 is 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 || ||11400 |
|Total shareholders’ funds || ||11500 |
Contractor Balance Sheet
As a UK limited company contractor, the company balances above could represent:
- The tangible assets will be your company equipment. Indeed, this could include computer or office equipment.
- Debtors 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 has not been received by the company year end.
- Cash at bank will be the balances in your contractor bank accounts. Therefore, this will include the current account balance and any savings or deposits account balances.
- Amounts falling due within one year for creditors will represent amounts owed by your company. Indeed, this will include Corporation Tax, VAT, PAYE/NIC and any balance on your director’s loan account.
- Called up share capital will represent the shares issued by the company. Therefore, as a contractor this will be your shares and the shares held by any other shareholder.
- Retained earnings is the company funds that have not been distributed yet. In the case of a contractor this will be available to pay to your company shareholders in the future.
Cash flow statement
In addition to the P&L and Balance Sheet, companies can also 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 will 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 will 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.
Included within fixed assets may be intangible assets. What’s more, these are assets that are not physical in nature. To clarify, that this will include goodwill, intellectual property, patents, trademarks, copywrites etc.
A company’s current assets will include various types of asset. What’s more, these will 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 will 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 Sheet 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 is 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 will show in the accounts as other debtors.
Current liabilities -creditors under and over one year
A company’s current liabilities include all the amounts owed to third parties on the Statement of Financial Position. Furthermore, this will consist of both short-term and long-term liabilities. In addition, the statement will show 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 that are owed to the tax offices. To clarify, this will include amounts owed for Corporation Tax, VAT and PAYE/NIC.
- Any bank loans and overdrafts that are owed. Therefore, this will 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 closed down. Indeed, 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 UK contractor company, the shareholders’ equity is usually the sum of the share capital and the retained Profit & Loss account figure. Basically, the P&L figure shows the business profits to date, which are still payable as dividends or as the capital when the company closes down.
Further thoughts regarding the Profit and loss account and Balance Sheet of a company
What is the difference between P&L and 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 you 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.
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 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. However, why are Profit and Loss accounts important and in addition, why are Balance Sheets important? To sum up, 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 now online accounting software available for UK businesses. Most importantly, this helps maintain your company’s book-keeping, VAT reporting and payroll processing/reporting.
The contractor P&L account and Balance Sheet are two key statements in your UK contracting company year-end accounts. What’s more, the mechanics of these are quite technical, but they may be of interest to you as a business owner. Most importantly, your accountant will take care of the work when they prepare your accounts. In addition, 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 your business accounts and this will give clues about where you can improve things for the future.
Link to Contractor Advice UK group on