Profit & Loss from Balance Sheet

[businessowner350]

Hi Everyone,

As we all know, small companies don't have to submit their "Profit and Loss" account to Companies House, but only an abreviated balance sheet.

Is there any way to "roughly" tell how much money the company made, just by looking at the balance sheet?

I appreciate that a lot of asumptions would have to be made (based on industry), but any points on where to start would be appreciated.

Thanks

 

[Anna Chandley]

Not really. You can calculate the retained profit for the year from the movement in the reserves on the balance sheet but this will not indicate the profits made. The retained profits will be reduced by any dividends paid and there will be no way to determine what, if any, dividends have been made.

 

[businessowner350]

How could I calculate the retained profit then?

What does the "Profit and Loss Account" entry under the "Capital and Reserves" section mean?

Thanks

 

[Anna Chandley]

Profit and Loss account in the capital and reserves section is the accumulated retained profit. To calculate retained profits simply deduct the prior year figure from the current year figure.

The problem is that say you have retained profits of £100 this could mean that the company made a profit after tax of £100 or it could mean that the company made a profit after tax of £100,000 and paid a dividend of £99,900.

 

[businessowner350]

And what if current year - last year is a negative value? Does this mean that the company either made a loss, or declaired a dividend greater than the current year's profit?

 

[Anna Chandley]

And what if current year - last year is a negative value? Does this mean that the company either made a loss, or declaired a dividend greater than the current year's profit?

Exactly. Although if the current year value itself is negative it is more likely to be because of a loss.

 

[businessowner350]

Exactly. Although if the current year value itself is negative it is more likely to be because of a loss.

Thanks for your help

I am looking at the balance sheets of 2 companies. One is a small company with abreviated accounts. Another is a large company, which I have the P&L accounts for.

For the large company, under the capital and reserves section on the balance sheet, there are the following items listed:

Called up share capital
Revaluation Reserve
Other Reserves
Profit and loss account

When I simply find the difference between the 2 profit and loss account values (current year - previous year), the resulting value (which is negative) is no where to be found on the Profit and Loss Account sheet. The company did make a loss though on the bottom line, but the bottom line loss on the P&L sheet is much greater than the difference between the 2 P&L values on the balance sheet

Any ideas?

Thanks

 

[Anna Chandley]

For the large company there should be a note showing the movements on each reserve account which should reconcile the profit and loss account figures to the balance sheet reserves figures.

 

[businessowner350]

For the large company there should be a note showing the movements on each reserve account which should reconcile the profit and loss account figures to the balance sheet reserves figures.

Thanks! Makes perfect sense now! The missing link was "retirement benefits"

Just one last question which is confusing me. The total for the "Capital and Reserves" section on the balance sheet always equals the Net Assets section on said balance sheet. How is this the case? To me, the profit and loss sheet details all of turnover and expenses incurred by the business, but the balance sheet talks about how much assets the company has.

Thanks

 

[Anna Chandley]

Just one last question which is confusing me. The total for the "Capital and Reserves" section on the balance sheet always equals the Net Assets section on said balance sheet. How is this the case? To me, the profit and loss sheet details all of turnover and expenses incurred by the business, but the balance sheet talks about how much assets the company has.

Thanks

Its a fundamental principal of accounting that your assets less liabilities are equal to your capital. Think of the profit and loss account as simply another note in the accounts that shows how you arrive at the retained profit figure in the capital section of the balance sheet.

In really simple terms you provide a service without incurring any expenses and get paid £1000 which is paid into your bank account. The profit and loss accounts shows a profit of £1000. The top half of your balance sheet shows an asset of £1000 (cash in bank) the bottom half of your balance sheet shows £1000 retained profit.

 

[businessowner350]

In really simple terms you provide a service without incurring any expenses and get paid £1000 which is paid into your bank account. The profit and loss accounts shows a profit of £1000. The top half of your balance sheet shows an asset of £1000 (cash in bank) the bottom half of your balance sheet shows £1000 retained profit.

Excellent! That makes things a heck of a lot easier for me! I guess any sales you make (i.e. turnover in the P&L account) has to be turned into some form of an asset on the balance sheet.

So another question comes up:
Let's say I buy a computer last year for £1000. This year the computer is worth £800. Where does the -£200 appear in my profit and loss account sheet? I'm guessing that the £800 would appear under "Fixed Assets" in the balance sheet

Thanks

 

[Anna Chandley]

You buy a computer for £1000 which goes in balance sheet. You then charge £200 depreciation that shows as an expense in your profit and loss account and gets added to accumulated depreciation on the balance sheet.

The net value of the computer on the balance sheet will be £800 and your fixed asset note in the accounts will show a cost of £1000 and a depreciation charge of £200.

 

[businessowner350]

Am I correct in saying that if I were to buy a company and use AIA against it (100%), does that mean that I would put a £1000 expense in the Profit and Loss Account sheet (Probably as an admin expense), and nothing would transfer over to the Balance Sheet as an asset? Bit confused here though as the cash in the bank would drop by £1000 on the balance sheet, but maybe that's ok as the P&L will be £1000 less

 

[Anna Chandley]

Am I correct in saying that if I were to buy a company and use AIA against it (100%), does that mean that I would put a £1000 expense in the Profit and Loss Account sheet (Probably as an admin expense), and nothing would transfer over to the Balance Sheet as an asset? Bit confused here though as the cash in the bank would drop by £1000 on the balance sheet, but maybe that's ok as the P&L will be £1000 less

No. You would show the asset on the balance sheet and depreciate it according to your accounting policies. The adjustment for AIA and capital allowances is made in the tax computation.

If you believe that the asset only has a useful life of one year or you have a policy not to capitalise items that cost less than a particular amount then you would post straight to the P&L as an expense.