Ok - we know that profit is income less expenses, but what costs are included?
Do you include your salary in costs if self employed?
Do you include depreciation of equipment and motor vehicles in costs?
Why should we include the above in costs? Because
a salary (or notional salary) will result in a profit after allowing for the labour cost, after all, how much might you earn as an employee doing the same work?
depreciation of equipment and motor vehicles recognises the usage of these assets in enabling you to run the business.
Without allowing for the above it is likely that profits are overstated!
Example 1
a) Sales less expenses = £27,000 profit, but
b) Sales less expenses less notional salary of £25,000 = £2,000 profit!
Example 2
Taking figures from Example 1b
£2,000 profit less depreciation of £5,000 on Van (say 25% of cost of £20,000) = £3,000 loss!
Remember
Allowing for salary and depreciation costs give a more realistic view of the
business.
Is your business really profitable and if not what can be done about it.
Phone me on 02083635502 or make an appointment using this link https://calendly.com/wrightaccounts