In its simplest definition, profit is the difference between the sales you have made less the expenses incurred in bringing the product or service ready to sell.
Sales – Expenses = Profit
The profit is what you get taxed on whether you are a limited company (corporation tax) or a sole trader (personal tax). So let’s have a look at all of these three things in a bit more detail.
This is the money you make on selling your product or service. It doesn’t matter how you receive the money, whether it’s by cash, cheque, credit card, online, or even if you have not received it yet, in other words if it is on credit. All of this must be accounted for when calculating your total sales for a period.
Business expenses are the costs incurred in bringing your goods or service to sale. This is where it can get a bit confusing as there are certain expenses that are not allowed and capital items are also treated differently. An allowable expense is one that is ‘wholly and exclusively’ incurred for the purpose of your trade.
Some common expenses that are allowed include:
Stationery and printing
Telephone and internet costs
Travel and accommodation
Use of home as office
There are exceptions but some of the main items that are not allowed even though might expect them to be include:
Subsistence costs such as tea and coffee unless you are staying overnight and then a reasonable cost is allowable
Finally, capital items are items that you buy to use in your business and expect it to last four years or more. They are usually large items also known as assets or plant or machinery or equipment such as laptops, desk or chair. They are tax allowable but the amount allowable as an expense is proportioned out over the number of years the item might last.
More details about expenses can be found on the gov.uk website here: https://www.gov.uk/expenses-if-youre-self-employed/overview
Profit is the excess of income over expenditure and is usually calculated when preparing a profit and loss account for a specific period of time. Profit can be differentiated between net profit and gross profit. Gross profit is the difference between sales and the direct cost relating to the goods or service. Net profit is the final trading profit of a business after taking in to account all general, admin and distribution costs. Loss occurs when your expenses are more than your sales. Most businesses don’t want loss but when you are starting out, you might incur more costs than the amount of sales you make. Any losses you make can be carried forward to the next year and set against the profit.
That’s a brief explanation of your profit. However, if you are require more details click here.
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For more information on this or for help with your tax returns, get in touch with Q.A. Accountancy Services.