Profit & Loss

If you are a Limited Company, or a sole trader who has accounts prepared, you’ll definitely have one of these. The Profit & Loss (or P&L) shows your businesses turnover, less cost of sales and other expenditure, to give your net profit (or loss) for the financial year. The P&L lists out the expenditure by category (i.e., wages, advertising, travel etc) and compares the values to the previous year, to give an overview of how your turnover has been spent in operations and the profit (or loss) that has been made, and how this compares to the previous year.

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Balance Sheet

If you are a Limited Company you’ll definitely have one of these, and if you’re a sole trader who has accounts prepared, you might have one of these. The Balance Sheet shows the equity of the business and how that is made up – of assets and liabilities. The assets (fixed, such as plant & machinery, fixtures and fittings, computer equipment, motor vehicles and property; and current, such as bank balance, debtors and prepayments) are totalled up and offset against the total liabilities (current, such as HMRC taxes and short-term loans; or future, such as long-term loans) to give the statement of financial position of the business at the given date. This then agrees to the capital and reserves, showing how that is calculated (from shares, retained earnings and reserves).

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Debtor

Someone that owes your business money, such as a customer that has not yet paid an invoice.

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Creditor

Someone that your business owes money to, such as a supplier who you have not yet paid the invoice.

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Fixed asset

An item purchased for long-term use with a useful life of a number of years and are not likely to be converted quickly into cash. This is typically things such as, laptops and phones, business motor vehicles, tools and equipment, desks and cabinets, or property.

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Financial year

The period of which a business prepares its financial statements to and from. This can be any 12-month period, or longer. Generally, for a Limited Company the financial year is set based on the incorporation date, with the first year of trading being more than 12 months, and then each financial year after that being for a 12-month period. For sole traders, this will run to 31st March each year.

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Tax year

This runs from 6th April – 5th April each year.