Introduction to Profit and Loss Accounts
Financial Reference Sheets
Future Practice Owner.
Declaration
Please note:
all financial information shared in this document is fictional data that has been created for learning purposes. It is not representative of any true financial data for Vets for Pets or Companion Care. This reference sheet has been based on the initial ‘reading a profit and loss statement’ created by the CMI, and hosted as part of Management Direct. Original content and information is, therefore, copyright 2017 Chartered Management Institute.
Future Practice Owner.
Profit and Loss
What is a profit and loss account? Please note: This fact sheet should act as a basic introduction to profit and loss accounts for practice
management with little financial knowledge. Refer to other sources for a more detailed understanding of budgets if required.
A profit and loss (P&L) account, also known as an income statement, is a crucial financial report that summarises your practice's revenues, costs, and expenses over a specific period, typically a fiscal quarter or year. This statement provides a comprehensive snapshot of your practice's financial performance, detailing how much profit or loss has been generated during the period. The P&L account begins with the total revenue earned from services and other income sources. It then deducts the cost of goods sold (COGS) to determine the gross profit. Following this, operating expenses such as salaries, rent, utilities, and marketing costs are subtracted to calculate the operating profit. The statement may also include non-operating income and expenses, such as interest and taxes, to arrive at the net profit or loss. By analysing the P&L account, you can easily assess your practice's profitability, operational efficiency, and overall financial health. It serves as a valuable tool for management to make informed decisions, investors to evaluate potential returns, and creditors to assess your practice's ability to meet its financial obligations.
Future Practice Owner.
Profit and Loss
Profit & Loss Account - Key Components
Revenue/Sales
Operating profit
The total amount of income generated from the sale of goods or services before any costs or expenses are deducted.
Earnings before interest and taxes. It is calculated as Gross Profit minus Operating Expenses.
Other income/expenses
Cost of goods sold (COGS)
Income or expenses not related to the core business operations, such as interest earned, gains or losses from investments, or foreign exchange gains/losses.
The direct costs attributable to the production of the goods sold by the practice. This includes raw materials and direct labour costs.
Gross Profit
Net profit before tax
Calculated as Revenue minus COGS. It shows the profit made before deducting operating expenses, interest, and taxes.
The profit remaining after all operating expenses and other income/expenses have been accounted for, but before taxes have been deducted.
Operating expenses
Net profit after tax (net income)
Costs required to run the practice that are not directly tied to the production of goods or services. Examples include rent, utilities, salaries, marketing, and depreciation.
The final profit available after all expenses, including taxes, have been deducted. This represents the company's actual earnings for the period.
Tax expenses
The amount of income tax the company is obligated to pay based on its taxable income.
Future Practice Owner.
Profit and Loss
Formulas
Description
Amount
Revenue - COGS
Gross Profit
Gross Profit - Operating Expenses
Operating Profit
Operating Profit + Other Income - Other Expenses
Net Profit before Tax
Net Profit After Tax
Net Profit Before Tax - Tax Expense
Steps to prepare a Profit & Loss Account
Make sure that everything is posted up to date, and that you have posted all final adjustments
Extract the revenue and expense accounts and list them in a logical format. If the credit balances add to a sum greater than the debit balances, a profit has been made. otherwise a loss has been made. Open the ledger for the next period. The opening balances for the assets, liabilities and capital accounts will be the closing balances from the previous period. All the income and expense accounts will be opened with a nil balance.
The accruals and prepayments are reverse posted into the new period.
Future Practice Owner.
Profit and Loss
Example profit and loss account
Description
Amount (£)
Revenue
£250,000
Cost of Goods Sold (COGS)
£60,000
Gross Profit
£190,000
Operating Expenses - Veterinarian Salaries
£80,000
- Rent
£20,000
- Utilities
£5,000
- Medical Supplies
£10,000
- Marketing
£7,000
- Depreciation
£3,000
Total Operating Expenses
£125,000
£65,000
Operating Profit (EBIT)
Other Income/Expenses - Interest Income
£500
- Investment Loss
£200
£65,300
Net Profit Before Tax
£13,000
Tax Expense
Net Profit After Tax
£52,300
Future Practice Owner.
Profit and Loss
Component Breakdown
Revenue: £250,000 [Total income generated] Cost of Goods Sold (COGS): £60,000 [Direct costs] Gross Profit: £190,000 [Calculated as Revenue (£250,000) minus COGS (£60,000)]
Operating Expenses: £125,000 Salaries: £80,000 Rent: £20,000 Utilities: £5,000 Medical Supplies: £10,000 Marketing: £7,000 Depreciation: £3,000
Operating Profit (EBIT): £65,000 [Gross Profit (£190,000) minus Total Operating Expenses (£125,000).] Other Income/Expenses: Interest Income: £500 [Income from any interest-bearing accounts or investments.] Investment Loss: £200 Net Profit Before Tax: £65,300 [Operating Profit (£65,000) plus Interest Income (£500) minus Investment Loss (£200).] Tax Expense: £13,000 Net Profit after Tax: £52,300 [Net Profit Before Tax (£65,300) minus Tax Expense (£13,000).]
Future Practice Owner.
Profit and Loss
Other Considerations
Appropriation
Appropriation is the dividing up of the profit after tax. It is important to ensure that appropriations are not classed as an expense, unlike interest which is an expense. It is a bad mistake to make.
Valuing stock
Two general principles which can be utilised include: FIFO (First in - First out)
This assumes that the goods purchased first are sold first. This is a very commonly applied principle and has much to commend it. It does matter because over a period of time goods have probably been purchased at different prices.
LIFO (Last in - First out)
This is the opposite to FIFO and assumes that the most recent purchases are sold first.
Video Spotlight: Profit & Loss Basics (Heelan Associates)
“If you don't know your numbers, you don't know your business” Marcus Lemonis
Future Practice Owner.
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