The profit and loss statement 043-03070010

A profit and loss statement (sometimes called an 'income statement') is a historical record of the business gross income derived during an accounting period and the costs and expenses incurred in generating this income. It usually covers a period of 12 months, but can be shorter. For example a new business operating for less than a year.

The profit and loss statement is not intended as an accurate guide to the future earning capacity of the business because it is a record of past performance.

A profit and loss statement will often detail the current year's figures alongside last year's figures. This allows easy comparison between the 2 years. It is usually prepared in conjunction with a business tax return.

Generally, the assessable income of a business is based on the net profit of a business. However, not all expenses claimed by a business for tax purposes are allowed by Centrelink to calculate the assessable income of a business.

• The profit and loss statement shows the type and value of the total business income from all sources
• It is also necessary to establish the type and value of all business expenses deducted from business income as not all expenses are allowable deductions from income under Social Security Law
• Once the total value of all business income is known, then the customer's share of the income can be calculated

Income can be amounts of revenue derived (not just amounts received) in the period covered by the profit and loss statement.

• Sources of revenue a business might have:
• sales
• interest
• fees
• rent
• profit or loss on sale of an asset
• Revenue items are resources or benefits received by the business during the financial period as a result of providing products or services to customers. Revenue refers to earnings from the operations of the business. It is usually shown separately from non-core business income, for example rent, interest, capital gain
• If a source of revenue is the Fuel Tax Credits, administered by the Australian Taxation Office, it is not a separate source of income but should be added into the business general income

Sales include both cash sales for which payment has been received and credit sales for which payment has yet to be received.

• Expenses are the outflows of resources required to generate revenue for the financial period.
• Expenses commonly incurred by a business in earning revenue include:
• wages
• insurance
• rent
• utilities
• depreciation
• Expenses detailed on a profit and loss statement can include those incurred but not yet paid

The gross profit of a business is the value of sales, less the cost of purchasing the goods sold during the period covered by the profit and loss statement.

The net profit of a business is calculated by deducting all the expenses incurred from the income received. The Assessable income for a business is based upon the net profit.

A profit will result when there is an excess of revenue/income over expenses. If expenses are more than revenue, the business result is a loss. This shows in a profit and loss statement by the word 'loss' or enclosing the amount in brackets. That is, ($5,000) indicates a loss of $5,000.

Included in the net profit of a business is accounting for the change in the value of stock of a business. The Cost of Goods Sold is a deduction from the gross profit.

Cost of Goods Sold = Opening Stock + Purchases - Closing Stock

When the customer provides a profit and loss statement including Cost of Goods Sold, there is no need to adjust the net profit. In some circumstances, there is a 'negative' Cost of Goods Sold included as income of the business.

If a customer supplies a profit and loss for less than 12 months, the net profit must be annualised to be coded on the Business Detail (BUS) screen.

For example, a customer provides a 3 month profit and loss statement (SU580) with net profit of $2,500. Expenses claims may be annual costs so must be apportioned to the period of the profit and loss statement.

• Remove non allowable deductions
• Divide the resulting net income by the number of days the profit and loss statement represents, then:
• for sole traders and partnerships, multiply by 364, or
• for private trusts and private companies, multiply by 365

When a customer provides more than 1 profit and loss for a business commenced part way through a financial year, the net profit must be annualised for coding the BUS screen. For example, a business commenced 1 January. The customer provides monthly profit and loss statements for the period 1 January - 30 June. The customer will have calculated in the last statement the figure for the period 1 January - 30 June, resulting in a calculation of a net profit of $5,000. The Service Officer must convert this to an annual figure.

Note: due to legislation, 365 days must be used when annualising private trust and private company income (SSAct section 1207Y) and 364 days when annualising sole trader and partnership income (SSAct Section 1073).