What is a profit and loss account?

The profit and loss account (p&l) is usually presented as a statement and it shows the trading activity and associated expenditure of an organisation over a defined period of time.


A typical p&l will contain the following:

Sales

This is the turnover of the business, the main source of income from sales of products or services. This figure is always net of taxes as these are payable to the government and do not form part of the income of the business.

Purchases (stock/inventory)

Purchases are the items of stock you buy in order to sell on to customers. A basic accounting principle is that income is exactly matched against the cost of generating that income. In this regard the stock or inventory on hand at the end of the accounting period is always deducted from the total purchases cost. These stock items will be used to generate future sales and will be matched against those sales in the next period.

Sales related expenditure

These costs are those that are directly incurred in the process of making a sale to a customer. They include items such as sales commission, promotional costs and courier charges.

Overheads

Lastly there are the overheads of the business. These are the costs incurred on the rest of the business that is not directly involved with the selling process. Examples of overhead costs are: admin staff salaries, lighting and heating, office stationery, computer maintenance and legal and accountancy fees.

Two versions of the profit and loss account

In published accounts the p&l account has a standard format, this is to aid understanding and interpretation of the information. The accounts are typically known as Financial (or Statutory) accounts and are subject to accounting and legal governing principles.

However, to really understand how your business is performing you need to prepare a fully detailed p&l account, this is an expanded version of the published accounts and usually has extra information such as ratio analysis and key performance indicators.

This version is typically referred to as the