How to use your profit and loss report
The profit and loss report is one of the most useful tools for small business owners and sole traders. Here’s how you can use your profit and loss report to help you understand your finances.
What is the profit and loss report?
As its name suggests, the profit and loss report shows the profit or loss for a specific period. It’s easy to understand and gives insight into where your money is going.
The profit or loss is obtained by adding up all the income for the period, then subtracting all the expenses for the period (income - expenses = profit or loss).
How to read your profit and loss report
In Bokio free accounting software the profit and loss report is generated automatically from your accounting. So, you can easily check in to see how your business is performing.
You can compare the profit and loss report for different periods, like the previous fiscal year. This is really helpful when analysing performance and finding anomalies.
The bookkeeping accounts starting with 4 are under ‘Income’, accounts starting with 5, 6, 7 or 8 are under ‘Costs’. These are known as profit and loss accounts.
How to use your profit and loss report
Before you read your profit and loss report it’s important to know the difference between doing your accounting on a cash or accrual basis.
With the accrual accounting method outgoing and incoming invoices are recorded when you send or receive them. The invoice is first recorded as accounts receivable or accounts payable, and you will also report the VAT at the same time. When you later receive your payment, or have made your payment, it should be recorded as a separate event. So, when you look at your profit and loss report you will have an up to date picture of your finances.
When you use the cash method, you do not record the invoice when it is sent to the customer, or when you receive a supplier invoice. Instead, you record it only on the day when the payment is actually made. So, no accounts receivable or accounts payable are created.
Reviewing your sales is a great place to start with your profit and loss report.
Comparing your profit and loss reports over different periods can help you identify trends in your sales. Seasonal trends are common and by comparing yearly reports you will be able to save money for quieter periods, or increase promotion during peak times to maximise sales.
Check your performance
Your profit and loss report will tell you how your business is performing. If you have a business budget, you can use the profit and loss report to see if you’re meeting your goals, if there are any anomalies, or if there’s room for improvement.
Review your expenses
If you find your profit isn’t as high as you would expect, you can look into your expenses to see where you money is going, and identify areas where you can reduce your spending.
Fill in your Self Assessment tax return
The profit and loss report is a really helpful way to make completing your Self Assessment tax return easy. Once you have finished your bookkeeping for the year and are happy that your figures in the Profit and Loss report are correct, you can then go to your Profit and Loss report and simply put the figures into your tax return.
Manage your finances with Bokio
With Bokio’s free accounting software, you have everything you need to do your bookkeeping, invoicing, and manage your expenses all in the same place. Plus, there are automated reports so you can take control of your finances.
We have everything you need to help you prepare for your Self Assessment tax return, submit your VAT Return for Making Tax Digital and keep the right financial records. If you need an extra hand, we can help you find an accountant to work with.
Accounting is kept simple with Bokio, so you have more time to spend running your business.