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Why is my profit not my profit?

As accountants, we hear this a lot, so I’ll endeavour to explain, and hopefully it won’t be too geeky.


The steps we take:

  1. We log into your Xero (other accounting software is available) and cast our eye over all your transactions.

  2. We move everything around because, quite frankly, you’ve taken your eye off the ball and your insurance is now in your telephone transactions. Not cool.

  3. We look at your capital vs revenue expenditure. (#geekyterm1 #geekyterm2) This is where the first bits of your supposed profit start to unravel slightly. You bought a new fridge for the office, and it was huge. A £1500 jobbie from a large warehouse, capable of holding more beer than you can drink in one evening. We move it from your P&L to the rightful place on your balance sheet. Result? Your profit has increased by £1500.

  4. We look at your gross wages. We see that although you only took a directors salary, you didn’t process it in your bookkeeping, so that needs adjusting for. For round figures, let’s assume that you took a modest £500 per month. Your company has incurred this expense, so it must be reported on your list of expenses. Result? Another £6000 adjustment to your profit.

  5. We consider any depreciation (#geekyterm3) and adjust for it. Depreciation is an accounting adjustment, made to reduce the value of assets in the accounts. It gets added back for taxation purposes, but we’re not there yet. I refer you back to the beer fridge (let’s not pretend that it’s just to hold milk….). We’ll depreciate it over 3 years, so let’s add £500 depreciation expense to your P&L. Result? Your expenses have increased by £500.

  6. We look at Prepayments. (#geekyterm4) Everybody pays insurance up front, for 12 months. If you pay out £2400 in February for the upcoming year, but only £200 of that actually belongs in the year that we’re doing, the remaining £2200 has to sit on the balance sheet as a prepayment Result? Another £2200 adjustment to your bottom line.

Can you see how this begins to take shape?


Let’s see a working example:

Your calculated net profit is: £20,000


Move the fridge out of P&L £1500

Directors salary (£6000)

Depreciation (£500)

Prepayment adjustment (£2200)


Adjusted profit £12800


How does this affect me and my business?


Well, on a day-to-day basis, if you’re putting money aside to pay your tax, then in an ideal world you’ll have some leftover, because you thought that you were paying tax on £20000, but it’s now nearer £12800 before any taxation adjustments. (that’s a conversation for another day).

But bear in mind that these are not the only adjustments we make. We also make changes for stock, debtors, and creditors, invoices received after the year-end, you name it, and we adjust for it. It’s just how we rock.


What action should I take?


Honestly? I’d keep putting that money aside. Unless your accountant is preparing full management accounts every single month or quarter, you don’t really have as clear a picture as you’d like in order to guestimate your tax liability.

If you want a fuller picture every month/quarter/6 months, then management accounts are the way forward.


I’d like to hear more.


If you consider that management accounts sound like something that you’d like to explore further, then please get in touch.




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