A profit and loss account is a summary of business transactions for a given period - normally 12 months. By deducting total expenditure from total income, it shows whether your business made a profit or loss at the end of that period.
A profit and loss account shows owners, shareholders or potential investors how the business is performing. Most of the information is also used by HMRC to check your tax calculations.
By law, if your business is a limited company or a partnership whose members are limited companies, you must produce a profit and loss account for each financial year.
Self-employed sole traders and most partnerships don't need to create a formal profit and loss account - but they do need to keep adequate records to complete their Self Assessment tax return fully and accurately.
The basic records you will need to keep are:
- a record of all your sales and takings
- a record of all your purchases and expenses
You may also need to keep:
- a separate list for petty cash expenditure if relevant
- a record of goods taken for personal use and payments to the business for these
- a record of money taken out for personal use or paid in from personal funds - this applies to limited companies
- back-up documents for all of the above
You will need the information above to create your profit and loss account and to complete your tax returns.
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