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Any business has to report its profit or loss. The size of your business and its financial success will determine where you have to file your accounts and what certain formats to have to comply with. If your business is a limited company, plc or LLP then you will need to file accounts with Companies House. Depending on the size of your turnover (not profit) will depend on exactly what information you have to include in these accounts and whether they have to be audited. Companies House is the Government agency that registers, monitors and ensure companies report as necessary under the Government regulations. These regulations only require the limited companies, plc’s and more recently LLP’s to file their accounts there, so if you are a partnership or a sole trader, you do not need to do this. A sole trader or partnership, will need to report their profit and loss to HM Revenue & Customs and will need to complete tax returns. When reporting to the Revenue, it can be beneficial to have simple accounts prepared even though they are only being submitted to the Revenue. These accounts do not need to be complex but could include a profit and loss account. The profit and loss account will show and support the figures which are shown on your tax return. Banks and financial companies use profit and loss accounts when they receive applications for any form of credit. So what is a profit and loss account and how do you create one?
Profit and loss accounts summarise your businesses financial transactions over a set time, usually a year, which then shows if your business has made a profit or loss. The top part of a profit and loss account shows the income for the business over the given time period and the bottom part will show the business’ expenditure. Anyone can create their own profit and loss account following this basis.
The income figures are then further analysed by showing your turnover figure and other income. Turnover can also be called business sales as it shows the income which has been received from the sales of your products or services (depending on your business type). There are several ways you can record your day to day/weekly or monthly income so that you can bring all the information together easily. You can do this by using a manual accounting book, by setting up a simple computer spreadsheet or you can look at purchasing an accounting software program.
Businesses can also receive money from other sources such as bank interest, sales from assets such as equipment, receive additional funding or rent which is all classified as other income.
Businesses should separate their costs into three categories under the headings of cost of equipment, cost of sales and business expenses. General business expenses which are necessary for your business to function including insurance, rent and rates, administrative expenses such as stationery will all be collated under the heading of business expenses. All the expenses for any equipment for the business is collated under the heading of cost of equipment. This will include cost of purchasing and leasing equipment which will also cover any vehicles the company owns or tools and machinery the company buys. Only expenditure relating to the business should be included in your profit and loss account and any personal expenditure should be taken out from the figures in your accounts.
You can decide on the best accounting period for your business but in some instances it can be easier and simpler if your year end finishes on 31 March or 5 April. This will mean your accounts will fall in line with the information and figures needed for your tax return and will make the process of completing your tax return easier. If your year end is out of sync with these dates, you can produce a set of accounts for a specific date period and then start again with yearly accounts. This means for instance that you start your first accounting period from the start to either 31 March or 5 April, which may not be a complete year and could be a number of months. After this you will produce yearly accounts to your new year end date.
All accounts have to be supported by invoices and receipts as well as your ledgers. As a business you must ensure that you keep all your paperwork to support your entries in your accounts for the legal time refrain which is a minimum of six years.
Hopefully you will now have an understanding of what a profit and loss account is, what figures are used, what it represents and how they are used. Many bookkeepers, financial and administrative assistants understanding profit and loss accounts are women bringing a range of experience and glamour to a business.
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Posted in Accounting · June 12th, 2010 · Comments (0)
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Posted in Accounting · June 10th, 2010 · Comments (0)