Lesson – Profit and Loss Account

By now it will be possible to layout your financial information in an accounting format. The first thing is a Profit and Loss Account (PLA) for a year that will give you information about whether or not the enterprise is likely to be viable. At the beginning the figures will be estimates based on your research and planned sales, in following years the figures will be based on the actual transactions in the first year and become more accurate.

The reason that we use the term Receipts and not Income is that social enterprises sometimes receive other forms of money that are not to do with income, such as grants and rents from property. Each enterprise will have different receipt and expenditure headings so make sure that you have listed all the costs and sales you expect. There are different ways to set this out and different terms used so when you look at other examples don’t be confused.

PLAs are laid out in the following way with the receipts at the top and expenditure at the bottom ― note that the exact form may vary from country to country and from company to company. Below you can find an example to calculate profit and loss account.

This example shows a trading profit of €20,800 and a total surplus of €21,800 when the grant is added at the end of one year. There are two types of profit, Gross Profit and Net Profit. The gross profit reflects direct profit or loss on the cost of sales (variable costs), while the net profit or loss reflects overall profit or loss including overheads (fixed costs). The reasons for displaying the information like this is for analysis purposes and to distinguish the tax liability, you will only be taxed on your net profit not the gross profit.

When constructing a PLA it is normal practice to do it for the first three years of trading. It may take this long to reach breakeven point. If by the end of the third year a breakeven hasn’t been reached, you must consider whether the proposed plan is viable.