02: Understanding profit and loss

The profit and loss statement shows your company’s trading performance over the last accounting period, and gives details of its revenues and expenses. It records sales, cost of sales, expenses, profits and losses and any tax provisions for the period being accounted for.

Any items of equipment bought or leased for long-term use are called fixed assets and cannot be deducted from taxable profits in the same way as expenses, but you can spread costs out over several accounting years.

The cost of sales is deducted from overall sales or turnover to arrive at the company’s gross profit before deduction of expenses.

Prepayments (eg insurance premiums) and accruals (eg electricity/other utilities) are matched to the period they relate to. Items not directly affecting profits, eg bank loans, are not included, but interest payments and bank charges are.