This time we look at the profit and loss account:

The format of a profit and loss account is pretty standard and of particular interets this time is how much can be drawn as a dividend.  From the top

  • Sales – this is the value of goods or services sold
  • Cost of sales – as the name implies it is the actual cost of the goods which you actually sell, this does not often apply to service industries
  • Gross profit – this is how much profit has been made by selling the goods
  • Overhead expenses – there are some costs which do not vary whatever size of the business is, such as rent, telephone costs, administration costs including salaries and stationery
  • Net profit – the amount of profit made after deducting the overhead expenses
  • Tax – as we are focusing on limited companies this is approximately 20% of the net profit (subject to tax adjustments)
  • Dividends – the owners or shareholders of the business may be paid a share of the profits as a dividend
  • Profit for the year – this is the amount which remains and contributes towards the value of the business as shown on the balance sheet which we look at next time.

This is a short explanation of the profit and loss and there may be particular circumstances which apply to you.  You should therefore seek professional advice before taking any steps based on the contents. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting, Gravesend, Kent – Accountants who “speak your language”