Get a picture of your profit and loss statement before tax time
A picture can tell a thousand words and your Profit and Loss Statement can hide a wealth of information – if you know where to look.
Many business owners know what a Profit and Loss Statement is, but don’t prepare one regularly.
Even if they prepare them, they often don’t take a good look at them.
A common problem is that business owners aren’t confident that it’s accurate, or worse still, they can’t make heads or tails of it.
With tax time approaching it’s the perfect time of year to get your head around how to make sure that your Profit and Loss Statement is as accurate as possible, and how to gain insight from the numbers.
4 Tips to ensure your figures are as accurate as possible
- Make sure your MYOB BankFeeds are up to date for all bank accounts, credit card accounts and loan accounts
- Make sure you have allocated all income and expenses correctly
- Make sure all bank accounts, credit card accounts and loan accounts are reconciled and outstanding deposits and cheques are definitely outstanding
- Another trick here is to ensure you don’t receive income or pay for expenses out of non-business bank accounts, as unfortunately it’s too easy for these to be missed by either yourself or your accountant.
If you don’t have dedicated business bank accounts and credit card accounts, do yourself a favour and get these set up asap with your bank and then get the bank feeds happening.
Many banks have fee free business bank accounts, but even if they charge you $10 per month, it saves you in the long run when it comes to record keeping and not missing out on valuable tax deductions.
What figures should be on your Profit and Loss Statement?
Let me start with a bit of Accounting 101 and explain exactly what your Profit and Loss Statement is.
It’s a statement showing your business’ income and expenses for a particular period – that period can be a day, a week, a month, a quarter or a year.
Remember, your income minus your expenses equals your profit (or loss).
As a rule I want you to think about your income as being what you pay tax on and your expenses as what you can claim as a tax deduction to reduce your tax.
When your start reviewing your Profit and Loss Statement, look at the account descriptions and the amounts.
Think about whether the income and expenses seem to have been correctly categorised, and whether the amounts seem reasonable.
While I’m at it, I may as well give you a quick lesson in Tax 101 and the ATO’s definition of assessable income and allowable deduction.
Assessable income – this is all your gross earnings or proceeds resulting from the ordinary course of your business.
Allowable deduction – you can claim a deduction for most of the expenses you incur in running your business, as long as they’re directly related to earning your assessable income.
What figures shouldn’t be on your Profit and Loss Statement?
If you know which items should be in your Profit and Loss Statement, it will be easier to identify items that seem out of place.
These items will need to be reallocated to the appropriate account on your balance sheet.
If you’re not confident doing this, ask your accountant or bookkeeper to reallocate them to the correct codes.
While you’re at it, also ask them to amend your MYOB BankFeeds rules so from here on in they start to get allocated to the correct account.
Likewise, if you’re wondering why some expenses haven’t appeared on your Profit & Loss Statement, perhaps flag them with your accountant and they can reallocate these at the same time.
Here’s a list of the items that commonly get allocated to the Profit & Loss Statement by mistake:
- Capital introduced into the business by its owners
- Loan funds received
- Tax refunds received
- BAS refunds received
- Sale of assets
- Owner’s personal expenses
- Loan repayments
- Tax payments
- BAS payments
- Superannuation payments that have already been processed via payroll
- Purchase of assets that need to be depreciated
Now you know what should and shouldn’t be on your Profit and Loss Statement, tomorrow we’ll go through the nuggets of gold you can get from it and how it can help you save on your tax bill.