A Guide to Understanding Profit and Loss Accounts

  • Price: £3.60
  • Published: December 2016
  • Type: Business Information Factsheet
  • Format: PDF

The profit and loss (P&L) account provides a record of how a business has performed over a specific period, which is usually 12 months for formal accounts and one month for management accounts. It provides a 'snapshot summary of the total income and expenses for that period. It will show a profit if income is greater than expenses, and a loss if expenses are greater than income.

All limited companies that are trading must prepare an annual P&L account to comply with company law. Self-employed sole traders, or anyone who is part of a business partnership, do not have a legal obligation to produce an annual P&L account but will need the information it contains to complete their self-assessment tax return.

The P&L account forms a key part of a firm's annual financial statements and should be viewed alongside the balance sheet to assess the financial performance and strength of a business. See BIF007, A Guide to Understanding Balance Sheets, for more information.

This factsheet outlines what information is typically covered in a P&L account and explains the commonly used terms. It looks at how the P&L account can be used to help manage a business and reviews some of the limitations of P&L accounts.

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