Even though companies have to provide balance sheet accounts annually as part of their financial accounts together with a profit and loss account, sole traders or self employed businesses do not have to provide a balance sheet, though they do have to give profit and loss details on their tax return to HM Revenue and Customs
- Profit and loss accounts
Profit and Loss statements show the overall performance of the business and compares the overall income against the expenses incurred in running the business over the period (usually for a year though management accounts can provide snapshot statements over a shorter time.
Elements of Profit and Loss Statements
- Income
This is the total amount received by the business during the year for which there are appropriate records of invoices and bank statements. Income is also called company revenue.
- Gross Profit
Gross profit is the total income less the cost of the goods sold, so this is the residual amount the company is left with after selling its good or services and deducting costs needed to produce that sale.
- Cost of Sales
This includes materials you buy for re-selling, raw materials or components that go into your product hires of machines or specific tooling needed for a project.
- Expenditure
These are the expenses, the “overheads” that are needed by the company in order to deliver its services. It will include such things as premises costs, energy costs and transport of goods. A self employed person or sole trader will be able to get advice from the accountant as to which expenditure are allowed expenses by the Inland Revenue. If in doubt all bills should be meticulously kept and filed under date order.