Profit and Loss Account

This is the running total of retained profit (or loss) the company has accumulated over its life, after tax and any dividends. As part of equity it normally carries a credit balance, increasing with each profitable year and decreasing with losses or dividend payments.

Real-world examples

Newly profitable small company

After its first full year of trading, a small company makes £18,000 of retained profit after tax. At the year-end close, that result is transferred into retained earnings: a credit of £18,000 to 3200 (Profit and Loss Account), with the corresponding debit spread across the income and expense accounts that made up the result. In practice most accounting software performs this automatically as part of the year-end close, rather than as a single manual journal.

Established company paying a dividend

A profitable company with substantial accumulated reserves declares a £30,000 dividend to its shareholders. Dividends are paid out of retained profit rather than treated as an expense, so the entry is a debit of £30,000 to 3200 — reducing retained earnings — and a credit of £30,000 to 1200 (Bank) once paid, or to a dividends-payable liability account if declared but not yet paid.

Growth-stage company carrying forward losses

A company investing heavily in growth — typical of an early-stage product or tech business — makes a £60,000 loss for the year, on top of accumulated losses brought forward. Rather than a credit balance, 3200 here carries a debit balance, reflecting negative retained earnings until the company trades profitably enough to work through its brought-forward losses.

Commonly confused with

Because code 3101 (Undistributed Reserves) sits right next to this one in Capital & Reserves, it's a common mis-posting target. Code 3200 is specifically for profit and loss account, while 3101 covers undistributed reserves — similar in nature, but keeping them separate is what makes the capital & reserves section of your management accounts meaningful rather than a single lumped total.

What a mis-posting here costs you

Because Profit and Loss Account sits within equity, errors here don't touch trading profit for the year — but they do distort the split between share capital, reserves and retained earnings that shareholders and the Companies House filing rely on being accurate.

Other codes in Capital & Reserves