A guide to the Profit and Loss report
This article explains what a profit and loss (P&L) account is and where to find it in FreeAgent. It also explains how to use the ‘Comparative’ profit and loss view and how to filter the report so you see only the figures you need.
A profit and loss account is a summary of the history of your business's trading during a given period of time. It shows your business's income from sales, bank interest, and other income such as the grant income, less its expenses.
Expenses might be directly linked to your sales, such as buying goods to sell to your customers, or they might be more general administrative expenses, such as buying stationery or paying your accountant. The expenses are taken away from the income to give your business's profit for the year.
The income and expenses will be worked out differently depending on whether you are using traditional accruals basis accounting or cash basis accounting. Please note that limited companies and limited liability partnerships must use accruals basis accounting. Legally, cash basis accounting is only available to sole traders, unincorporated landlords and partnerships.
Traditional (accruals) basis of accounting
If you are using accruals basis accounting to draw up the P&L account for your business, your business’s profit won’t be the same as the balance in your business bank account, because there are likely to be non-cash items in the profit and loss account - for example, if your business hasn’t been paid for all of its sales.
Therefore, the sales figure in the profit and loss account reflects the invoices dated during that period of time, along with any other income received during the period that has been explained as ‘Sales’ but does not have a corresponding invoice. Money received from customers in respect of invoices reduces the trade debtors figure on the balance sheet and will not impact the P&L.
When preparing your accounts using the accruals accounting basis, costs are recorded when the costs are incurred. Therefore, when you create a bill, out-of-pocket expense or explain a bank transaction as a ‘Payment’ in FreeAgent, the cost will impact the P&L on the date of the bill, out-of-pocket expense or bank transaction.
Cash basis of accounting
If you are using cash basis accounting to draw up the P&L account for your business, the P&L will show sales and costs based on the dates that money changed hands.
The sales figure will show money received from customers during the time period covered by the P&L, as opposed to invoices dated during the period which remain unpaid.
Costs will include payments made against bills during that time period, as opposed to bills dated during the period which remain unpaid. Any unpaid invoices and bills will show on the trade debtors and creditors reports on the balance sheet in FreeAgent.
How is the profit and loss account useful?
In addition to showing how your business is doing, a profit and loss account has other useful functions.
The first is that the tax your business pays, be that Income Tax or Corporation Tax, is worked out based on its profits. But these profits have to be adjusted for tax, because some expenses, such as business entertaining, have to be added back in. This is why it's important to make sure you categorise your costs correctly when you’re recording your bills and expenses in FreeAgent.
The profit and loss account is also useful to limited companies as the company can only pay dividends to its shareholders up to the limit of the profit the company has made after Corporation Tax, plus any profit from previous years that it has in reserve.
If you’re a company director, you must check the profit and loss account to make sure that the company has sufficient profit available before declaring a dividend. If you're unsure whether this applies to your business, please speak to your accountant.
Please note that the figures on the P&L are rounded to the nearest whole figure. To see a more detailed breakdown of the figures in each account, select the individual category.
What isn't included on the profit and loss account?
You won't find anything that your business owns or owes on the profit and loss account. These are called 'assets and liabilities' and are found on the balance sheet.
That’s another reason why your business’s bank balance isn't the same as profit. Cash in the bank would also be affected by non-profit and loss items, such as buying capital assets, when using accruals basis accounting. Capital assets are pieces of equipment or furniture that will last your business more than about a year, and as they're something the business owns, they go on your balance sheet. If you are using cash basis accounting, you may treat capital assets as day-to-day running costs instead and put them on your P&L.
Where is the profit and loss account in FreeAgent?
Navigate to the ‘Accounting’ tab at the top of your screen and choose ‘Reports’ from the drop-down menu.
In the ‘High Level’ section, choose ‘Profit & Loss’.
You can choose whether you want to view your profit and loss account for a specific month, quarter, year, the current accounting year so far or a custom date range.
How to use the ‘Comparative’ profit and loss view
When you select the ‘Comparative’ tab on the ‘Profit & Loss’ overview, you can compare two different quarterly or annual reports side-by-side, or you can view a custom date range.
The ‘Difference’ column shows the financial difference between period 1 and period 2.
The ‘Percentage change’ column shows the financial difference as a percentage. The arrow indicates if the difference has increased (arrow pointing upwards) or decreased (arrow pointing downwards).
Viewing details on the profit or loss account
If you need to see the details of what makes up any of the figures on the profit and loss account, select the figure.
This will display a list of the transactions that it includes.
Viewing your profit and loss figures on your FreeAgent Overview screen
You can also see a brief snapshot, taken from the yearly profit and loss account, of your business's income and day-to-day running costs for the current year to date so far on your Overview screen.
Do the figures on your profit and loss account include VAT?
If your business is registered for VAT and not using the VAT Flat Rate Scheme, then all the figures on your profit and loss account will be exclusive of VAT. If you're using the Flat Rate Scheme, your costs will be inclusive of VAT, your sales net of standard VAT and the difference between the flat rate and standard rate from your sales will show in the Flat Rate Scheme Surplus account. If you're not registered for VAT, all the costs on your profit and loss account will include VAT, and you won't have charged VAT on your sales.
Exporting your profit and loss account account
You can export the profit and loss report as either a CSV or PDF file. To do this, select ‘Export Report’ in the top-right of the screen and choose the appropriate format from the drop-down menu.