Accounting reports and what
they tell you
Reference guide: Emily Coltman, FCA
Accounting reports help you find out how your business is doing financially. Here’s an introduction to the reports that you’re most likely to find useful as a freelancer.
Profit and loss report
A profit and loss report is a summary of the business’s income, less its day-to-day running costs, over a given period of time. This report is also known as the “profit and loss account”, “P&L account” or just “P&L”.
The profit and loss report aims to show whether the business has earned more in income than it has spent on day-to-day running costs. If your business’s income is more than its costs, the business has made a profit; if the business’s costs are more than its income, the business has made a loss.
The information you get from the profit and loss report gives a great insight into where and when your business is making or losing money, enabling you to come up with some informed strategies to increase your profitability.
Note: Income and costs must nearly always be included in the profit and loss report on the basis of when work was done and when goods and services were used, not on the basis of when money was received in and paid out. The only exception is for sole traders and partnerships who use the simplified cash basis to prepare their accounts; these businesses’ profit and loss accounts will be prepared on the basis of money in and money out.
Questions you can answer using the profit and loss report
Balance sheet
A balance sheet is a report that shows how much a business owns (assets) and owes (liabilities) at a given point in time. If the total of the balance sheet is a negative number, the business owes more than it has the resources to pay; in other words it is “insolvent”.
Your balance sheet will show:
Fixed assets: Also known as capital assets, fixed assets tend to have quite a high cost (compared to day-to-day running costs) and will be useful to your business over a long period of time, usually more than two years. For example, computer equipment, furniture or machinery would be classed as fixed assets. Cheaper items, such as batteries, do not count as fixed assets.
Current assets: Whereas fixed assets are expected to be retained and used by the company for a long period of time, current assets are expected to turn into cash within a year. For example, stock (goods that a business sells), money owed to the business by customers and any cash in the business’s bank account are all current assets.
Current liabilities: A current liability is money that your business owes which it will have to pay within a year. For example, taxes, money owed to providers of external services such as your accountant, and money owed to suppliers are all current liabilities.
Long-term liabilities: A long-term liability is money that your business owes which it will have to pay in over a year’s time. For example, if your business has a bank loan or a mortgage, then the part of this due within a year will appear in the current liabilities, and the remainder will be long-term liabilities.
The balance sheet differs from the profit and loss report as it shows a summary of how much your business is worth at a specific point in time. The profit and loss report shows your business’s profitability over a period of time.
Aged debtors report
An aged debtors report is a totalled list of all the invoices your customers haven’t yet paid you for, less any credit notes you’ve issued to your customers and not yet refunded them for. You can use the aged debtors report to pick out customers who typically pay you late or not at all, and target your efforts to chasing them.
The aged debtors report usually sorts the invoices and credit notes by customer and by date, and groups together unpaid invoices that are due in various time periods. It enables you to see how much you can expect to receive from each customer and the total amount that should reach you by a specific date.
The aged debtors report usually divides out unpaid invoices that are due to be paid to you within 30 days, in 30 to 60 days, in 60 to 90 days and in more than 90 days.
Questions you can answer using the aged debtors report
Aged creditors report
An aged creditors report is a totalled list of all the bills that you haven’t