![]() ![]() Wages can be included in cost of sales or administrative expenses, it depends on how directly attributable the wages are to the generation of sales and where the owners/managers want it shown.įor instance, some traders like to see their gross profit margin without the impact of wages, and therefore will include wages under administrative expenses instead. Administrative expensesĪdministrative expenses are the business overheads. It shows the sales mark-up and can therefore highlight inefficiencies and pricing issues. The gross profit margin is probably one of the most important figures to the business owner and manager. Gross profit is simply the difference between your sales and cost of sales. This ensures that only the stock purchases used for the current period’s sales are reflected. Therefore, the stock adjustment excludes the stock at the period end and includes the stock brought forward from the last period. Any stock that you hold at the period end has not been used to generate this year’s sales. ![]() You will also notice from the example below, that cost of sales includes an adjustment for stock. And as with sales, any invoices for goods or services you have received from your suppliers will be included, whether they have been paid or not. Cost of salesĪs its name infers, this represents the costs incurred to generate your sales. It may even include work you have undertaken but not yet completed (let alone invoiced), depending on if you provide services and the particular circumstances they are provided under. Sales figureĪt the top of the trading account is the sales figure – this will include all the work invoiced, whether the invoice has been physically paid by the customer or not. Within this, sits the sales figure and costs of sales. This is because it shows only the direct trading activities of the business. The top section of the profit and loss account, up to and including the gross profit, is referred to as the trading account. There is no absolute measure of materiality, but loosely speaking, a material error is defined as an error that would affect decision making.ĬTA Run your business from Central London in one of our flexible and innovative commercial properties The trading account The financial statements needn’t be 100 percent accurate, but they should be free from ‘material’ errors. These items will affect the balance sheet instead. This means income such as grants, cash injected by the owners and bank loans received are typically not shown here Any purchases of significant equipment, loan repayments, drawings, HM Revenue & Customs payments etc won’t be shown either. The profit and loss account only shows revenue transactions that are connected with the commercial activity of the business. any VAT charged/incurred is not included in the profit and loss account. If you are VAT registered, your income and expenses are likely to be shown ‘net’ of VAT, i.e. Preparation of the profit and loss account What’s included? The figures are included on documents such as tax returns and finance applications, and can affect relationships with investors, customers and suppliers. Key business decisions taken by the owners or managers are often based on the them. The financial statements of any business are important. You could think of the profit and loss as a video of what has happened over the year and the balance sheet as a still photograph. In contrast, a balance sheet is a ‘snap shot’ of the assets and liabilities of the business at a particular point in time. ![]() It summarises the trading results of a business over a period of time (typically one year) showing both the revenue and expenses. The profit and loss account forms part of a business’ financial statements and shows whether it has made or lost money. Waiving the retainage clause in a contract is considered a major incentive to entice a contractor to work for a client.In this article we break down what a profit and loss account is, how to prepare one and what it means for your business. Retainage is less likely to be imposed when the client needs to have a project completed within an unusually short period of time. The retainage amount should not be so large that the contractor is forced to finance a project.Ī retainage is more likely to be imposed by a client on a new contractor, since there is more uncertainty about the contractor’s performance. Since the amount of retainage (typically 10%) may comprise the entire profit of a contractor, it is considered a powerful incentive to ensure that a project is completed in accordance with the wishes of the client. If the final inspection finds problems with the contractor’s work, the retainage will continue to be held by the client until the targeted issues have been rectified. This withholding is intended to ensure that the quality of the contractor’s work is adequate. Retainage is a portion of a contract’s total price that is withheld until project completion. ![]()
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