What is a profit and loss report?

Definition of a profit and loss report

The profit and loss report is a summary of the business’s income, less its day-to-day running costs, over a given period of time.

This report is also known as the ‘profit and loss account’, ‘P&L account’ or just ‘P&L’. It aims to show whether the business has earned more in income than it’s spent on day-to-day running costs.

If the business’s income is more than its costs, the business has made a profit. If the business’s costs are more than its income, the business has made a loss.

Sole traders or partnerships who have opted to use the accruals basis of accounting, as well as limited companies, must prepare their P&L on the basis of when work was done and when goods and services were used, not on the basis of when money was received in and paid out.

Sole traders and partnerships who use the cash basis of accounting to prepare their accounts can prepare their P&L on the basis of money in and money out.

P&L and VAT

If the business is registered for VAT and not using the flat rate scheme, its income and costs will be included on the P&L exclusive of VAT.

If the business is registered for VAT but is using the flat rate scheme, the income still shows net of VAT, but the costs will show inclusive of VAT, because on the flat rate scheme, VAT cannot be reclaimed on costs.

If the business is not registered for VAT, then the income will not have had VAT charged on it, and the costs are shown inclusive of VAT, because you can’t reclaim VAT if you’re not registered.

You can generate profit and loss reports easily with FreeAgent’s accounting software.