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Keeping Accurate Records of Profits and Costs

By: Tracy Whitelaw - Updated: 5 Nov 2010 | comments*Discuss
Profit And Loss Account P&l Business

New business start up costs can be lengthy and often for those who are inexperienced in keeping business records, many items you purchase or work you have carried out in your collectibles business will not be added to your costs. In order to maintain a true representation of your business, it’s essentially to keep accurate profit and loss records so that you know how well you’re doing and so you’re able to easily organise your tax at the end of the year.

Profit and Loss Accounts and Balance Sheets

One of the most important objectives of any collectibles business is to make a profit. In order to fully understand how well your business is doing, you need to keep track of the Profit and Loss account (P&L). Along with the Balance Sheet, the Profit and Loss account is crucial as it shows the profit or loss of your business over a certain period of time. The Balance Sheet can give you an instant snapshot of what state your business affairs are in at the current moment in time, but it’s not usually suitable for future projections or as an indicator of how well you’re doing across the year. Generally, most businesses will be expected to keep their own records of p&l and will usually follow the simple formula of; revenues received by the business minus the costs involved in generation the revenue, equals the profit you make. If you’re a limited company or a partnership whose members are part of a limited company, you legally need to produce a p&l account for each year. If you’re a sole trader, you don’t have to, but it can help when you are filling in your self-assessment tax return form. You need to keep self-employment records for five years and limited companies or partnership records should be kept for six years after the latest tax return. This shows the importance of keeping accurate records.

Keeping Accurate Profit and Loss Accounts

Keeping accurate Profit and Loss Accounts has a multitude of benefits when it comes to your collectibles business. It shows you just how well you’re doing over the year and can be used as an important record should you require a loan or mortgage. As mentioned, it can also make your tax records much easier to fill in and if you get an accountant to help with your self-assessment, having an accurate record of p&l will make his or her job easier. Accurate records can also provide you with backup for any claims you might want to make for allowances and reduces your risk of interest or penalties for late tax payments. Keeping yourself organised throughout the year will make it easier overall to have a full understanding of where your business is going.

Knowing the Basics

There are a few essential aspects of keeping basic Profit and Loss Account records.

  • Keep a list of all sales and other income
  • Keep a list of all expenditure
  • If you use petty cash, keep a note of it
  • Keep records of goods taken for personal use
  • If you use any money for personal use, list it
  • Keep backups of all your information

Typical Profit and Loss Accounts

Profit and Loss accounts can be kept in a variety of ways, but most people keep their own records rather than getting an accountant to do them. This is because it’s relatively easy to keep track of p&l in your own small business. It becomes more complicated when you start to branch out into other premises or your business grows at a fast rate. The easiest way to look at it is to go through it in simple stages.

  • Gross profit of your collectibles business is found by deducting the cost of sales from your annual turnover. Your cost of sales refers to the direct costs of buying in your stock. Turnover refers to the values of the sales made during your annual period (where calculating annually)
  • Operating profit can be found by subtracting the expenses from your gross profit. The operating profit is the profit earned from carrying out normal business operations whereas net profit can take into account other sources of income, for example, interest paid on loans etc. Expenses are anything that are involved in the overheads of running your business

Deciding on Traditional or Modern Methods of P&L Record Keeping

Another decision you’ll need to make will be whether you’ll keep your Profit and Loss Accounts on a computer or on a simple ledger book. Many people are happy to stick with the traditional method of pen and paper and this is fine if you’re running a small business. If you want to make backup copies, have the ability to email copies or print them when needed, it’s easy to set up a P&L account on any basic spreadsheet package. Many people use Microsoft Excel without a problem, while others will spend money on an actual software package. It’s entirely up to you, but probably using the computer method will be better long term as if your business grows, this is going to be easier to manage.

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