All industries have their own jargon and accountancy is no exception. It is easy to forget that not everyone is familiar with standard words and phrases so hopefully this article will shed some light on some commonly used words and expressions.
Profit and Loss statement or Income Statement This is a financial report that shows how much your business has spent and earned over a specified period, usually a year. It aims to show whether your business is making or losing money.
Turnover This is sales made or fees charged for goods and services your business supplies before any other costs or expenses have been deducted. It is Turnover that is used to work out if your business should register for VAT.
Cost of Sales or Direct Costs These are costs that relate directly to the sales you make. For example, if you run a shop, it would be the cost of the stock that you sell and the wages you pay to staff who work in the shop.
Gross Profit Turnover less direct costs. Gross profit is often expressed as a percentage of turnover to calculate if sales prices are being set at the right level and to enable direct comparisons to be made with other periods.
Expenses or Overheads The other costs of running your business. Amongst others these can include rent, motor expenses, light and heat, advertising, telephone, and accountancy fees.
Net Profit/Net Loss This is the amount that remains once all the business costs are deducted from the business income. If the number is positive this is a profit. If the number is negative this is a loss.
Taxable Profit This is profit on which you have to pay tax. Taxable profit may be different to net profit as there are expenses such as entertainment and depreciation that are not allowable by HM Revenue & Customs but there are some additional allowances that can be included.
Next month I will look at the Balance Sheet but as always if you have any queries speak to your accountant for an explanation.
Carol Draper FCCA
Clifton-Crick Sharp & Co Ltd
