Balance Sheet & P&L explained for limited company directors

If you’re running a limited company, your company accounts will contain a balance sheet and a profit and loss statement. They form part of your statutory annual accounts.

In this concise guide, Christian Hickmott, MD of Integro Accounting, explains what these terms mean – specifically as they relate to small companies.

What is a Profit and Loss Statement?

Your profit and loss statement shows the amounts your business has earned and spent over a given period.

The statement shows your revenues (how much the business has earned) alongside your expenses, such as salaries, rent and other business costs.

If the difference is positive, it’s your profit; if negative, it’s a loss.

Using the P&L statement internally

The main function of your profit and loss statement is to help you (as the company director) and your accountant establish the financial health of your business.

The P&L statement allows you to see how your business is doing at a glance and points you in the right direction if you need to raise revenue or slash costs.

For instance, it might highlight specific underperforming products or services or expose areas where costs are disproportionately high compared to revenues.

For example, it may be that only once you see everything written down next to each other do you realise that you’re wasting money on a certain expense or missing a trick by not charging a client extra cash.

The profit and loss sheet also allows you to monitor changes in earnings over time. For example, you might produce a profit and loss sheet for the entire year to see how you’ve done over a longer period, followed by one just for the last month.

This gives you an idea of what costs have gone up, for example, meaning you can make better decisions about what your company should be spending on.

What is a Balance Sheet?

The word “balance” might make you think that this document is the same as the comparison columns in the profit and loss sheet – but there’s one key difference you should be aware of.

A balance sheet simply provides a snapshot of your company’s financial position at a particular moment in time rather than over a period of months, as a profit and loss statement would.

The main aim of a balance sheet is not to show how much cash you’ve made or lost, but to shed light on how your company is funded.

It follows the fundamental accounting equation: Assets = Liabilities + Equity. This shows what the company owns (assets), what it owes (liabilities), and the owners’ stake (equity/shareholders’ funds).

Key components of the Balance Sheet

Assets are typically divided into current assets (e.g., cash, inventory, and accounts receivable) and non-current assets (e.g., property, equipment, and long-term investments).

Liabilities are divided into current liabilities (e.g. accounts payable, taxes due) and long-term liabilities (e.g. loans).

Equity represents the shareholders’ investment plus retained profits (or minus losses).

If the amount designated as assets doesn’t equal liabilities plus equity, there’s an error in the books that needs fixing – it could signal bookkeeping issues or deeper problems if persistent.

A balance sheet, then, shows what the company owns, what it owes and the shareholders’ interest in the business at that particular point in time.

Retained profits and cash aren’t the same thing

Profits that aren’t paid out as dividends remain in the company and form part of shareholders’ funds on the balance sheet. However, retained profit isn’t necessarily the same as cash in the bank, because the company’s other assets and liabilities will also have changed.

When do I need to submit these documents?

All limited companies have a statutory obligation to provide HMRC with accounts as part of their Company Tax Return submission. These include the profit and loss account and balance sheet and are used to calculate the company’s Corporation Tax liability.

Your Company Tax Return must normally be filed within 12 months of the end of your company’s Corporation Tax accounting period. For official details, see the HMRC Company Tax Return guidance.

You must also file accounts with Companies House within 9 months of your year-end (first accounts usually have a longer window: up to 21 months from incorporation). Check the GOV.UK overview on filing accounts for limited companies.

Small company accounts

Small companies (for accounting periods starting on or after 6 April 2025) qualify if they meet at least 2 out of 3 of the following criteria:

• Annual turnover ≤ £15 million
• Balance sheet total ≤ £7.5 million
• Average number of employees ≤ 50

Under the current rules, qualifying small companies can prepare abridged accounts if the relevant conditions are met. They may also file accounts at Companies House with the profit and loss account omitted from the public filing – commonly referred to as filleted accounts. The company still prepares a profit and loss account as part of its accounts.

From April 2028, abridged accounts will be abolished, and small companies will have to file a profit and loss account with Companies House, although they will be able to opt out of having it displayed on the public register. Read more on the Integro Accounting site here.

Micro-entity accounts

Many smaller limited companies qualify as micro-entities if they meet at least 2 out of 3 of the following criteria:

• Annual turnover ≤ £1 million
• Balance sheet total ≤ £500,000
• Average number of employees ≤ 10

This currently allows even simpler filings (balance sheet + basic notes at Companies House), so only the bare minimum of your financial status appears on the public record.

From April 2028, micro-entities will also have to file a profit and loss account with Companies House, with an option to keep the P&L off the public register.

See the Companies House guidance on preparing and filing accounts for full details on micro-entity and small company rules.

Other practical situations where you need full accounts

Aside from these obligations, you will need to produce full financial documents if you want to bring in investors, or if you need to take out a bank loan or overdraft.

Prospective investors and lenders will almost certainly want to become familiar with your company’s financial health before committing any funds.

If you bid for new business, you may also need to prove that your company is in good financial health. This applies especially to contracts awarded by public sector bodies such as local councils.

Accurate, timely accounts aren’t just a legal box to tick – they’re a powerful tool for running your limited company effectively.