Why Your Bookkeeping Software’s Profit & Loss Reports Might Be All Over the Place
Ever looked at your bookkeeping software’s profit and loss reports and thought, “What on earth is going on?” One month you’re smashing it with record profits, and the next, it looks like you’re operating at a huge loss. Don’t worry, you’re not alone.
We often chat with business owners about the accuracy of their financial data and the conversation goes something along the lines of:
Business owner: “Well, I just run a profit and loss report from the software.”
Brisan: Cool. But is that actually accurate?
Business owner: Not really…
So what’s causing these wild swings in your P&L reports? It usually comes down to how and when income and costs are recognised. Let’s break it down.
Revenue Recognition: Timing is Everything
Your accounts should reflect the reality of when work is done, not just when invoices are sent or cash is received. Here’s why that matters:
1. Accrued Income / Work-in-Progress
You’ve done the work; provided services, supplied labour and materials, but haven’t billed for it yet. Technically, that income belongs in the month the work was completed. If it’s not shown there, your profits could look artificially low one month, then spike the next when you finally bill.
2. Deferred Income
On the flip side, you’ve billed upfront for a project that spans several months. The income should be spread over the period the work relates to and not lumped all into one month. Whether that’s evenly split or front-loaded depends on how the work is structured.
3. Selling Vouchers?
It gets even trickier with vouchers:
- Single-purpose vouchers (e.g. redeemable for one type of product/service): income is recognised when sold.
- Multi-purpose vouchers (redeemable for multiple things): income is recognised when redeemed.
For multi-purpose vouchers, there’s even a VAT twist as VAT is only due on redemption. If they expire unused? You recognise the income then, and no VAT is payable. Win-win for the voucher seller.
Cost Recognition:
Just like revenue, costs should match the period they relate to and not necessarily when you pay them or billed for them.
1. Prepaid Expenses
Paid or billed upfront for subscriptions, insurance, services or rent? These should be treated as prepayments and spread across the months they cover. Dumping them all in one month distorts your costs.
2. Accrued Expenses
If you get billed in arrears (think utilities or suppliers who invoice late) you can still estimate and accrue those costs in the month they relate to. It helps smooth out those nasty surprises later on.
Stock: A Common Culprit
Bought a truckload of stock but haven’t sold it yet? That cost shouldn’t hit your profit and loss in one go.
You need to reflect:
- Opening stock (what you had at the start of the month)
- Purchases
- Closing stock (what you haven’t sold yet)
Most modern bookkeeping systems such as Xero or Quickbooks have stock tracking tools, or can integrate with third-party inventory apps. If you’re doing manual stock counts, you’ll need to adjust the numbers manually in your software.
So What’s the Big Picture?
Your bookkeeping software is a tool, but without proper management accounting, it won’t give you the full picture. A lot of business owners assume this is all part of the bookkeeper’s job. But here’s the truth:
Not all bookkeepers are trained in management accounting.
Many are trained to process transactions, not interpret or adjust them.
How Brisan Can Help?
At Brisan, we love preparing management accounts. Why? Because we know how valuable accurate, up-to-date data is for making smart business decisions. It’s the difference between guessing and knowing. We do this through our Clarity, Insight or Challenge packages.
We’re also big believers in training. If someone in your business handles the bookkeeping and you’d like them to take it further to actually understand and produce reliable management accounts, we can help. Whether it’s ongoing support, guidance, review through our Clarity Call Service or training, we’ve got your back.
Book in for a call to discuss how to take your accounting to the next level.
