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March 20, 2012 at 3:31 am #977431Up::0
Hi all you wonderful people,
My understanding of profit and loss statements are that it reflects the following:
Revenue – Less Expenses = Operating Profit. Operating Profit + Bank Interest = Net Profit
If that is the correct, where are the tax liabilities/payments recorded to give a true reflection of what your profit is?
Hope that makes sense!
Thanks,
March 20, 2012 at 3:38 am #1096644Up::0Debbie, tax liabilities have nothing to do with your profit – they are a balance sheet item.
It’s really important in running your own business that you understand the difference between the two, and that you also understand how to read your profit & loss, trial balance, and balance sheet.
This article gets you started on the basics, then I think it would worth your while to read further to completely understand these reports.
Hope that helps !
Wendy
March 20, 2012 at 3:38 am #1096740Up::0Debbie, tax liabilities have nothing to do with your profit – they are a balance sheet item.
It’s really important in running your own business that you understand the difference between the two, and that you also understand how to read your profit & loss, trial balance, and balance sheet.
This article gets you started on the basics, then I think it would worth your while to read further to completely understand these reports.
Hope that helps !
Wendy
March 20, 2012 at 8:35 am #1096645Up::0Debbie22, post: 110278 wrote:Hi all you wonderful people,My understanding of profit and loss statements are that it reflects the following:
Revenue – Less Expenses = Operating Profit. Operating Profit + Bank Interest = Net Profit
If that is the correct, where are the tax liabilities/payments recorded to give a true reflection of what your profit is?
Hope that makes sense!
Thanks,
Hi Debbie, Let me have a go at this one too, because most of what you have written above is spot on, then right at the end there is one line which is ambiguous.
So yes to the whole revenue less expenses to get Operating profit (if you want to refine this you could split expenses into cost of goods sold and expense, but let’s leave that for accounting 102). Ditto yes to operating profit plus bank interest (actually plus or minus “non operating items” such as bank or other interest received or paid) to get net profit.
But then there is one more section to your P&L, covering things such as income tax expense (and dividends paid). So you’re exactly right you do need a couple more lines at the end of that P&L that says net profit – tax = profit after tax (and if you do retain profits and pay these out as dividends you’ll need some more lines as well, another subject for accouting 102).
So the area of ambiguity in your post: you have asked where “tax liabilities / payments” get posted. And these are different things, and they don’t go in the P&L. Your tax accountant should post a journal to your accounts which is a debit to tax expense (that is the bit above that gets you from operating profit to profit after tax) and a credit to tax liability. And as Wendy has written the liability would sit in the balance sheet. Now when you pay the tax (usually many months later) that payment comes out of your bank account and get posted to the tax liability – so the liability (ie the amount you owe to the ATO) comes back to zero. Neither the tax liability nor the payment hit the P&L.
Hope that makes sense, but happy to have another go if not!!
Cheers, Rhys
March 20, 2012 at 8:35 am #1096742Up::0Debbie22, post: 110278 wrote:Hi all you wonderful people,My understanding of profit and loss statements are that it reflects the following:
Revenue – Less Expenses = Operating Profit. Operating Profit + Bank Interest = Net Profit
If that is the correct, where are the tax liabilities/payments recorded to give a true reflection of what your profit is?
Hope that makes sense!
Thanks,
Hi Debbie, Let me have a go at this one too, because most of what you have written above is spot on, then right at the end there is one line which is ambiguous.
So yes to the whole revenue less expenses to get Operating profit (if you want to refine this you could split expenses into cost of goods sold and expense, but let’s leave that for accounting 102). Ditto yes to operating profit plus bank interest (actually plus or minus “non operating items” such as bank or other interest received or paid) to get net profit.
But then there is one more section to your P&L, covering things such as income tax expense (and dividends paid). So you’re exactly right you do need a couple more lines at the end of that P&L that says net profit – tax = profit after tax (and if you do retain profits and pay these out as dividends you’ll need some more lines as well, another subject for accouting 102).
So the area of ambiguity in your post: you have asked where “tax liabilities / payments” get posted. And these are different things, and they don’t go in the P&L. Your tax accountant should post a journal to your accounts which is a debit to tax expense (that is the bit above that gets you from operating profit to profit after tax) and a credit to tax liability. And as Wendy has written the liability would sit in the balance sheet. Now when you pay the tax (usually many months later) that payment comes out of your bank account and get posted to the tax liability – so the liability (ie the amount you owe to the ATO) comes back to zero. Neither the tax liability nor the payment hit the P&L.
Hope that makes sense, but happy to have another go if not!!
Cheers, Rhys
March 20, 2012 at 9:08 am #1096646Up::0I agree with both answers.
Put another way you get:
Revenue
Minus cost of goods sold (COGS)
Equals Gross Profit.Minus operating expenses
Equals operating profit, or Earnings Before Interest, Depreciation and Tax (EBITD).Minus depreciation, dividends and tax
Equals Retained Earnings – the proverbial “bottom line” of the P&L. And actually represents the real profits left in the business.That tax has been incurred but won’t have been paid on the 30th June, so is payable, and belongs on the balance sheet as well along with any other amounts payable.
The difference between “accrual” and “cash” accounting can make this subject hard to follow too, but perhaps that’s Accounting 103.
March 20, 2012 at 9:08 am #1096744Up::0I agree with both answers.
Put another way you get:
Revenue
Minus cost of goods sold (COGS)
Equals Gross Profit.Minus operating expenses
Equals operating profit, or Earnings Before Interest, Depreciation and Tax (EBITD).Minus depreciation, dividends and tax
Equals Retained Earnings – the proverbial “bottom line” of the P&L. And actually represents the real profits left in the business.That tax has been incurred but won’t have been paid on the 30th June, so is payable, and belongs on the balance sheet as well along with any other amounts payable.
The difference between “accrual” and “cash” accounting can make this subject hard to follow too, but perhaps that’s Accounting 103.
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