What is a profit and loss report?
Definition of a profit and loss report
The profit and loss report is a summary of the business's income, less its day-to-day running costs, over a given period of time.
This report is also known as the 'profit and loss account', 'P&L account' or just 'P&L'. It aims to show whether the business has earned more in income than it's spent on day-to-day running costs.
It's the end of the tax return as we know it! Find out about HMRC’s Making Tax Digital plan and how it will affect you with our free guide.
If the business's income is more than its costs, the business has made a profit. If the business's costs are more than its income, the business has made a loss.
Income and costs must nearly always be included in the P&L on the basis of when work was done and when goods and services were used, not on the basis of when money was received in and paid out. The only exception is for small sole traders and partnerships who use the simplified cash basis to prepare their accounts; these businesses' P&L accounts will be prepared on the basis of money in and money out.
P&L and VAT
If the business is registered for VAT and not using the flat rate scheme, its income and costs will be included on the P&L exclusive of VAT.
If the business is registered for VAT but is using the flat rate scheme, the income still shows net of VAT, but the costs will show inclusive of VAT, because on the flat rate scheme, VAT cannot be reclaimed on costs.
If the business is not registered for VAT, then the income will not have had VAT charged on it, and the costs are shown inclusive of VAT, because you can't reclaim VAT if you're not registered.
Example of a profit and loss report:
You can generate profit and loss reports easily with FreeAgent's accounting software.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.