What is profit?
Definition of profit
Your profit is the amount that your business has left over once its day-to-day running costs have been subtracted from its income.
In your business’s accounts, your profit is illustrated in your profit and loss report.
If you’re self-employed, you need to pay tax on your 'taxable profit' as part of your Income Tax liability. Taxable profit is an adjusted profit figure that's calculated through your tax return each year.
Example of profit:
If your business's income over a given period of time is £200,000 and its running costs over the same period were £120,000, you would work out your profit as follows:
£200,000 - £120,000 = £80,000 profit
This is also known as your 'accounting profit'.
Your business's taxable profit is worked out by adding back any costs that HMRC don't allow you to use to reduce your tax bill (called 'disallowable' costs, for example business entertaining), and then taking off any reliefs that aren't part of your accounting profit, such as allowances for buying a new asset ('capital allowances').
Retained profit is accounting profit that's built up in your business over one or more years, which the business hasn't paid out to its owners.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.