Why do profit and loss accounts matter?

What is a profit and loss account? 

A profit and loss account is a summary of the income and expenditures of a business in a certain period, ususally of 1 year. You can think of it as your company's financial housekeeping book. You simply add up all the revenues of your business and then deduct your expenses. 

Is a profit and loss account mandatory?

The profit and loss account and the balance sheet together make up the financial statements. Eenmanszaken (sole proprietorships) are not required to draw up financial statements, while bvs are. 

What is included in your profit and loss account? 

You put your turnover (revenue), expenses, and profit in your profit and loss account. Your profit can also be negative; then it is called a loss.

Turnover is the result of the sales of products and/or services over the course of one year. You must then deduct the purchase value from the revenue. Next, you add up all the business expenses. Your profit is the outcome of this sum: turnover minus purchase value and expenses. 

Example

On page 17 of the Book of Finance, you will find an example of a profit and loss account (income statement). 

Profit and loss account as annual statement

Employees receive an annual statement from their employer once a year, which shows the gross wage for that year, the social security contributions withheld, and payroll tax. This tells employees at a glance how much their employer paid and how much salary they received. Is the employee able to live on this money, rent or buy a house, or redeem a loan? In addition, the annual statement is a means of verifying income for an income tax return, the Employee Insurance agency (UWV), or mortgage providers. 

If you are an independent business owner, you will not automatically receive an annual statement telling you how much profit your business earned during a particular year. But you would like to know the income from your work. The profit and loss account is a type of annual statement for your business, which will also tell you how much you earned in turnover, how much you spent on purchasing, and what your expenses were. Just like an employee, you look back and calculate whether your bottom line is sufficient to cover personal expenses, repayments, and interest. 

Financial insight into your business

Your profit and loss account gives you financial insight into your business. With the figures from your profit and loss account, you can adjust your business. Is the net profit up or down? A positive result is one you want to maintain or even increase. Discuss the figures with your financial advisor. An expert such as a bookkeeper or accountant through NOAB or NBA (both in Dutch) can help you.

For instance, discuss costs, how to save, price calculations, and purchasing advantages. Compare your data with those of entrepreneurs in your sector. Get them from your sector organisation or bank.

Profit and loss account as basis for financing

Financiers find valuable information from your profit and loss account and balance sheet. They do this with calculation formulas (key figures). The outcome tells them whether your business is healthy. A financier looks at your turnover and purchase data. And compares your figures with those of other businesses in your sector.

Proof for the Netherlands Tax Administration

You have to pay tax on your business profits. The amount you pay depends on several different factors, including your profit and the type of tax (income tax or corporate tax) and on tax schemes.

Every company has to keep records. The Tax Administration determines how much you need to pay after checking your records. If you have an accurate profit and loss account, you will receive a tax assessment for the correct amount. If you inaccurately state the amount in profit you have earned, the Tax Administration will estimate your profit. This estimate is usually not in your favour.