The Profit & Loss Account
What the Profit & Loss Account tells us
The Profit and Loss account tells us how much the company has sold to its customers
in the accounting period (usually a one year period) and how much the company
has expended. Ideally the company spends less than it sells, but this is not always
the case!
You can find explanations of all the headings under the Profit & Loss Account
in Glossary of Terms.
What happens to the profit before tax?
Along comes the government...
All Governments in all parts of the world are very interested in companies because
they generate employment and an end of year profit that can be taxed.
This tax is called "Corporation tax". Corporate taxation is very complicated,
and the rate paid depends on many things including:-
Previous years profits or losses;
Regional policy;
Allowances for depreciation on fixed assets.
Rates in Britain are now amongst the lowest in the developed world. Even the
so-called tax havens such as Jersey will charge Corporation tax.
The Shareholders need a return on their investment...
The reward for taking a risk and investing their own money in a company comes
when the shareholders get a share in the profits. This is in the form of a "Dividend"
per share. The shareholders receive a payment in proportion to the number and
type of shares they hold.
There must be enough cash in the business to pay this dividend. However, many
hundreds of thousands of companies do not pay dividends. These are usually "Owner
managed" companies where the shareholders and directors are the same individuals.
They opted for the structure of a Limited liability company for the protection
it brings (and they receive a salary from the company as paid employees).
For many public companies, and especially those quoted on the Stock Exchange,
a dividend is expected, and shareholders expect their directors to be able to
deliver one (and preferably one that is higher than last year's!).
The Company itself needs more money...
Some of the profit will be retained in the business. It will be used to help
finance the purchase of what is needed to help grow the business in the future.
This means that the company will have funds available to purchase fixed assets
that will contribute to future profits.
It should be remembered that all of the profit after tax belongs to the shareholders,
and any profit retained in the business is recorded on the balance sheet as
in practice it is always owing to the shareholders.
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