FINANCIAL LITERACY • 5 MARCH 2021 • 3 MIN READ

What’s included in a profit and loss account?

SECTIONS

Income

Cost of sales / Direct costs

Gross profit

Operating expenses

Shareholder remuneration (for companies)

Non-cash expenses

Net profit (loss) before taxation and adjustments

Non-deductible expenses

Net profit or loss for the year

We’re about to break down exactly what makes up your profit and loss account.

But first, a note.

If you’re using automated accounting software, you may want to double-check that you’re correctly classing each expense as direct costs (which impact gross profit) and operating/overhead expenses. You can find instructions on how to do it in Xero, here.

Income

Also known as sales or revenue, income can come from:

Selling goods
Providing services
Clients reimbursing certain expenses
Earning interest

Cost of sales / Direct costs

These expenses relate directly to the sale of goods or services*.

Opening stock
Purchases of goods (products to sell)
Purchase of raw materials (for processing, then selling)
Purchases of materials (materials used in the construction industry)
Freight and packaging – bringing materials and goods to you, and delivering to customers
Commission paid to salespeople
Contractors and subcontractors
Maintenance of factory plant and machinery (the more units produced, the more maintenance is required)
Wages for factory workers (if they’re based on units produced, rather than per hour)
Closing stock

* Not all businesses will have a cost of sales section. It’s usually only applicable when you’re selling goods or performing work that involves raw materials (e.g. construction). Those in the service industry are likely to exclude this section and only have expenses of an operating nature.

Gross profit

After deducting any costs of sales from income, you have the gross profit. These should be enough to cover operating expenses.

Operating expenses

These are costs that generally remain consistent, no matter the level of sales.

Advertising
Bank fees
Computer and IT expenses
Insurance
Interest
Office rent
Power
Printing, postage, and stationery
Professional fees (legal, accounting, consulting)
Telephone and internet
Salaries
Staff expenses

Shareholder remuneration (for companies)

A shareholder may be remunerated (paid) in one of two ways:

Paid wages as a regular employee, with PAYE, Kiwisaver deducted; or
A shareholder salary calculated by an accountant when preparing the end-of-year financial statements – this is applicable in situations when the company profit is being partially or fully allocated to shareholders

Non-cash expenses

Depreciation of property, plant, and equipment
Gains or losses on the sale of assets
Certain accountant adjustments

Shareholder salary
Reimbursing a director or shareholder for using part of the home as an office
Adjusting for any private portion of business expenses

Net profit (loss) before taxation and adjustments

This is what’s shown as taxable income in your tax return. It represents the business income, minus the expenses that can be claimed for tax purposes.

Non-deductible expenses

These are business expenses that can’t be deducted from taxable income:

A portion of entertainment expenses
Certain legal expenses
Fines and penalties
Initial costs of setting up your business
Income tax

Net profit or loss for the year

The non-deductible expenses cannot be claimed as tax deductions, but they are still business expenses. After taking those into account, we arrive at the net profit or loss.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world.

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.