Understanding Your Accounts
Profit and Loss Account
The profit and loss account is fairly straightforward to understand.
Here is an example for a company with a year end of 31 March 2017:
- Add up your all your sales for the year
- Add up all your expenses for the year and categorise them
- Deduct expenses from sales and you’re left with profit
- To calculate your Corporation Tax, simply multiply the profit by 19%
- Corporation tax on the above would be £34,932 * 19% = £6,637
The profit and loss reports the position of the company at 31 March 2017. At the start of the next financial year (01 April 2017 in this case), any profit is transferred into the balance sheet and all the sales and expenses figures are reset back to £0.
A balance sheet shows the financial stability of a company at the year end date. If the company year end date is 31 March 2017 then the balance sheet will show the position of the company at that date.
Here is an example of a balance sheet (ignore previous figures in the profit and loss account):
Notice that net assets and shareholder’s funds are the same value? It balances (hence the name balance sheet!).
The net assets section (or the ‘top half’) represents all the assets and liabilities of the business.
The shareholder’s funds (or the ‘bottom half) shows how the net assets have been arrived at (through profits and equity).
Unlike the profit and loss, the balance sheet does not reset back to zero at the start of a new year.
Long life assets which are generally more expensive than normal purchase are added here – for instance expensive computer equipment or office desks.
The profit and loss account is reset back to zero every year, but we want to account for the long life asset over a number of years so we keep it in the balance sheet.
These are short term assets that the company holds at the year end.
Trade Debtors – if you raised an invoice at 31 March 2017 but it didn’t get paid until the middle of April, it would be included here. It’s money due to the limited company, therefore an asset.
Cash at bank – the company bank account balance at the year end. This is obviously a company asset. If you had a bank overdraft, it would be a company liability.
These are liabilities (or amounts the company owes) that are generally due within 1 year:
Trade Creditors – the opposite of a trade debtor. If you bought something from a supplier on 31 March 2017 but didn’t pay their invoice until the middle of April it would go here.
Corporation Tax – your company tax bill. Always due 9 months and 1 day after your company year end so it goes here.
VAT – the balance of VAT due to HMRC at the company year end date. Usually paid every quarter so goes here.
Director loan account – money that the company is due you. Remember that the company and yourself are two separate entities, therefore even though it may be your own company, if you have any expenses due or have loaned the company money then it’s still a company liability.
Simply add the fixed assets and the current assets, deduct the current liabilities and you have the net assets of the company.
Capital and Reserves
This is the “bottom” half of the balance sheet.
Share capital – the total value of all shares in the company
Profit and Loss - Remember when we said the profit and loss account gets reset every year? The profit (or loss) figure goes here and every new financial year any profits (or losses) get added to the previous year total.