Incredibly, many business owners still do not realise the importance of producing accurate profit and loss statements here in New Zealand.
Whilst profit and loss statements do not form part of your annual return to the IRD, it is nevertheless mandatory for businesses to produce these records. Where a business is audited by the IRD, the business would be expected to produce P&L Statements on demand, while lending institutions or potential buyers into a business would also expect to see accurate profit and loss statements as a sign of good financial planning and continuity.
As chartered accountants, we prepare profit and loss statements yearly on behalf of our clients, at the same time as we complete annual filing to the IRD.
Whilst we’re here to ease the burden on our clients and do the heavy lifting, it’s prudent to ensure you have at least a basic understanding of how your accounts are put together, both for interpretation of the reports we provide and for understanding your business’ annual performance.
It is not uncommon for business owners to mistakenly believe that they can simply add all the receipts and payments, then subtract all expenses from the company bank account to calculate profit for a period. The reality is a little more complicated, especially where trusts, assets and liabilities are at play.
What is a profit and loss statement?
A profit and loss statement shows your company performance (profit or loss) over a specific period of time – generally one tax year – and is produced when we prepare your annual company report and tax return for submission to the IRD, although a P&L report can be produced at any stage where there is a need to understand your business performance, or if a third party (such as your bank) require access to up-to-date reporting.
Profit and loss statement example:
Bonus: click here to download a free profit and loss statement template for Excel, which you can use at any time for your business, courtesy of Agar Fenwick.
How to calculate net profit using profit and loss statements
Calculating profit and loss for your business begins with the total net value of your sales for the period accounted (usually yearly). GST is ignored in this figure (as it is a tax, accounted for in GST returns, and does not form part of your profit or loss).
Cost of Sales
Next, we calculate any direct costs incurred in making those sales. Costs must relate directly to the sales: an example cost of sale might be the cost of any goods or sub contracted services procured in order to deliver your product or service to your end customer.
After deducting cost-of-sales, we then deduct any operating costs for your business, such as rent, power, marketing costs, employee wages and shareholder salary. Think of operational costs as any cost you pay regardless of how well your sales team perform.
Note, where you incur costs that do not relate (or perhaps only partially relate) to the accounting period in question, we make necessary adjustments to your profit and loss statements to account for this overlap. It is important that your profit and loss statements only account for income gained and expenses incurred during the defined accounting period. An example here might be if your business bought an annual contents insurance policy for your business premises mid-way through the tax year. Adjustments would be made to your profit and loss to reflect what percentage of this cost applied to the current tax year, with the rest being rolled over as a cost in the following year’s accounts.
Any fixed asset within your business that does not qualify as a revenue expense and has a cost value exceeding $500 (with some exceptions), must be declared as an asset, tracked in your company asset register and depreciated over the period of time defined by the official IRD depreciation rates (which vary depending on the asset in question).
Asset management can become complex where disposal or sale of assets prior to their fixed life depreciation timeframe occurs, resulting in gains which must be accounted for. Further complications can occur when certain assets that do not incur the ‘straight-line’ depreciation method are procured.
If this seems confusing, don’t worry! By engaging Agar Fenwick as your professional accountants, you can rest assured that your profit and loss statement (and your company tax returns) accurately reflect the correct depreciation of any assets within your business.
Your net income, minus your cost-of-sales expenses, minus your operating costs, minus any depreciation on assets – leaves you with your net profit(before tax) for the current year.
The final step is to add your net profit (or loss – but hopefully not!) to any profit and loss from previous tax years.
Dividends may be paid out to shareholders from post-tax profits, so should not be paid unless there are sufficient funds remaining in the profit and loss statement for the year.
Profit and loss statement on demand and FREE profit and less template
If you are a Xero customer, your profit and loss statement is available to you at any time, for any defined period historically.
For a guide on how to access your profit and loss statement in Xero, click here to visit Xero online.
If you aren’t yet an Agar Fenwick client or do not have access to Xero for access to instant profit and less reports, we’ve got a free downloadable NZ profit and loss template for you to use! Just click here to gain access to your free download!