The P&L Account and Balance Sheet

The P&L Account and Balance Sheet

Written by scott291074

March 20, 2021

Introduction

The P&L account and Balance Sheet are the two main statements in a company’s set of accounts.
First of all, when you have your own UK company, it will need to file accounts with the two UK authorities.
Your business will have a `year-end.’ It is the date that the accounts are `made up to.’ What’s more, the accounts will need filing once per year.
Please note, the two official bodies that you will need to file your accounts with in the UK are:

Abbreviated accounts 

Key to note, an abbreviated version of the accounts need filing with Companies House. I have summarised separately all of the company / personal tax filing requirements when you run your own business. The accounts that are filed with Companies House show less info than the full version, and they only show the info that is you need to comply with current requirements. They do not include the Profit and Loss Account, but they do contain the Balance Sheet. In contrast, the full accounts and business Tax Return need filing with HMRC.
Furthermore, every company has a financial `year-end.’ Indeed, this is the date in the calendar year that the accounts are `made up to.’
There are two key pages in a set of company accounts. First of all, there is the Profit and Loss Account. Next, there is the Balance Sheet. We will now take a good look at these pages. Both of them provide key info with regards to your business’ finances.

The two main pages in company accounts 

P&L account (Profit and Loss account)

This page in the accounts will show the business’ trading results for the year or period that the accounts cover. It also shows how well the business has or has not done. Please note, this is also the income statement.
The business turnover/revenue and any other sources of income also show here. This page also displays the business expenses / outgoings of the business. The Profit and Loss account, in turn, will reveal the business’ profit or loss. It will also show the tax charge for the year or period that the accounts cover.

Balance Sheet

The Balance Sheet is one of the main pages in the account. It shows all of the assets and liabilities of your business. Also, it will include the balances owed to and by the business. It also shows the shareholders’ equity. The values that display on the Balance Sheet are those as at the business year-end date.
As a result, this provides a snapshot of a moment in time. It shows where the company stands with its finances.

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

On the Balance Sheet there are sections for:
  • Fixed assets 
  • Current assets 
  • Current Liabilities 
  • Shareholders’ funds 

The main types of financial tags that appear in company accounts 

Fixed Assets

Fixed assets will normally include computer equipment, office equipment, and motor vehicles. The Net Book Value shows up on the Balance Sheet.

Current Assets

A company’s current assets will normally include:
  • Company bank account balances; 
  • Trade debtors. These are amounts owed to the company by its clients; 
  • The value of any stock; and 
  • Any other debtors owed to the company. These could include any loans, such as the director’s loan accounts.

Current Liabilities

A company’s current liabilities will normally include:
  • Amounts owed to the tax offices. These will include amounts owed for Corporation Tax, VAT and PAYE/NIC; 
  • Bank loans and overdrafts; 
  • Accruals. These are amounts payable for any costs and expenses as at the year-end; and 
  • Any other amounts owing by the company. It could include a company credit card or director’s loan account.

Shareholders’ Funds

Shareholders’ equity or shareholders’ funds represent the company’s assets minus its liabilities. These show the company’s net value/worth at the Balance Sheet date.  Indeed, this is key financial information. It would show the value which will return to the shareholders if the company closed down. If this took place, the business would cease operations. It would liquidate all of its assets and settle all of its liabilities.
In a typical contractor company, the shareholders’ equity is usually the share capital and the retained profit and loss account. The profit and loss account figure shows the profits of the business to date, which is still payable as dividends.

Further thoughts   

What is the difference between the two key pages?

The Profit and Loss account shows how well the business has done. It shows this by subtracting the expenses from the income. What’s more, it shows 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. It shows its actual value at the year-end date. What’s more, it also shows all of the amounts that are due to and from the company. Included in this is any long term items. 

How important are financial accounts for contractors?

To sum up, as a contractor with your own company, you need to prepare and file your accounts with the official bodies by law each year. Further to this, you are not likely to require them for any other purpose other than sending them to Companies House and HMRC. The P&L account & Balance Sheet are the statements that show your business’ financial results and latest position.
However, if you apply for a mortgage, the mortgage provider may ask you to provide copies of your accounts to the lender. As a result, your accountant will normally help you to do this.
In contrast, for other businesses, accounts are key documents. They show how well the business is performing. In conclusion, lenders and potential investors will use the accounts to show how well you manage the company in terms of its finances.

Final thoughts

The P&L account & Balance Sheet are two key statements in the year end accounts. The above is quite technical, but it may be of interest to you as a business owner. Your accountant will take care of the work when they prepare your accounts and make sure that these are right for you. What’s more, as you can see, there are two key pages, and these will show how your business is doing. Finally, these will also help give you some clues about where you can improve things.
Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/

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