The Profit and Loss Account

The profit and loss account is probably the most important account for all businesses. Unless you are making a profit there is little point in being in business.

The profit and loss account covers all of your trading activity for the accounting period in question, usually 12 months. This period may vary, however, usually in the first year of trading, not only to take account of the requirements of the Inland Revenue but also to make your tax return easier to prepare.

The profit and loss account will summarise your sales income, or turnover, and itemise the actual cost of those sales. This will lead to the calculation of your gross profit. Your other overhead expenses will then be deducted to arrive at a net profit figure. The profit and loss account will then show how that profit has been distributed using an appropriation account.

As with all the other figures in your financial accounts the profit and loss figures will come from your trial balance. The one exception will be the figure for closing stock. The only way that this figure can be accurately obtained is by undertaking a physical stock check, or stocktake, of all the unsold goods. A value can then be placed on them, based on the cost price or the net realisable value, whichever is lower. Once you have this information you can then calculate the actual cost of goods sold:

Opening stock plus purchases less your closing stock = cost of goods sold

This method will have given you the relevant information regarding your stock value, but at this stage no double entries have been made in the books.