We’re about to break down exactly what makes up your profit and loss account.
But first, a note.
If you’re using automated accounting software, you may want to double-check that you’re correctly classing each expense as direct costs (which impact gross profit) and operating/overhead expenses. You can find instructions on how to do it in Xero, here.
▶ Income
▶ Cost of sales / Direct costs
▶ Gross profit
▶ Operating expenses
▶ Shareholder remuneration
▶ Non-cash expenses
▶ Non-deductible expenses
▶ Net profit or loss
Cost of sales / Direct costs
These expenses relate directly to the sale of goods or services*.
- Opening stock
- Purchases of goods (products to sell)
- Purchase of raw materials (for processing, then selling)
- Purchases of materials (materials used in the construction industry)
- Freight and packaging – bringing materials and goods to you, and delivering to customers
- Commission paid to salespeople
- Contractors and subcontractors
- Maintenance of factory plant and machinery (the more units produced, the more maintenance is required)
- Wages for factory workers (if they’re based on units produced, rather than per hour)
- Closing stock
* Not all businesses will have a cost of sales section. It’s usually only applicable when you’re selling goods or performing work that involves raw materials (e.g. construction). Those in the service industry are likely to exclude this section and only have expenses of an operating nature.
Operating expenses
These are costs that generally remain consistent, no matter the level of sales.
- Advertising
- Bank fees
- Computer and IT expenses
- Insurance
- Interest
- Office rent
- Power
- Printing, postage, and stationery
- Professional fees (legal, accounting, consulting)
- Telephone and internet
- Salaries
- Staff expenses
Shareholder remuneration (for companies)
A shareholder may be remunerated (paid) in one of two ways:
- Paid wages as a regular employee, with PAYE, Kiwisaver deducted; or
- A shareholder salary calculated by an accountant when preparing the end-of-year financial statements – this is applicable in situations when the company profit is being partially or fully allocated to shareholders
Net profit or loss for the year
The non-deductible expenses cannot be claimed as tax deductions, but they are still business expenses. After taking those into account, we arrive at the net profit or loss.
Our next article takes a look at interpreting the profit and loss account.