Company law offers two profit and loss account formats. Format 1 analyses costs by function, into cost of sales, distribution costs and administrative expenses, and shows gross profit. Format 2 analyses costs by nature, into materials, staff costs, depreciation and other expenses, and shows no gross profit. Each format puts different information on the face of the account, so the choice decides what has to go in the notes.

Which formats does company law allow?

Paragraph 1(1)(b) of Schedule 1 to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409), and the same paragraph in the large and medium company regulations (SI 2008/410), says every profit and loss account must show the items in either of the formats in Section B. There used to be four. Formats 3 and 4 have been omitted from both Schedules; for small companies this was done by the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980). Micro entities have a much shorter single format in Section C, covered on the FRS 105 page.

FRS 102 uses these formats. Paragraphs 5.5 and 5.7 require the income statement to follow Part 1 of Schedule 1, and paragraph 1A.14 applies the same rule to small entities using Section 1A. A basic explanation of what the profit and loss account shows is in financial statements explained.

How does Format 1 analyse costs by function?

Format 1 groups costs according to the activity they support. In the small company Schedule the items are numbered:

  1. Turnover
  2. Cost of sales
  3. Gross profit or loss
  4. Distribution costs
  5. Administrative expenses
  6. Other operating income

These are followed by income from group undertakings, participating interests and other investments, interest receivable, amounts written off investments, interest payable, tax on profit or loss, profit or loss after taxation, other taxes, and profit or loss for the financial year. Note (11) says cost of sales, distribution costs and administrative expenses are stated after any necessary provisions for depreciation or diminution in value, so depreciation is spread across those functions rather than shown as one line.

The judgement in Format 1 is allocation. A delivery driver’s wages belong in distribution costs; a factory supervisor’s wages in cost of sales; the finance team in administrative expenses. Consistent allocation is what makes gross margin comparable from year to year, and the stock valuation policy feeds directly into cost of sales.

How does Format 2 analyse costs by nature?

Format 2 groups costs by what was bought or consumed, regardless of which part of the business used them:

  1. Turnover
  2. Change in stocks of finished goods and in work in progress
  3. Own work capitalised
  4. Other operating income
  5. (a) Raw materials and consumables; (b) Other external charges
  6. Staff costs: (a) wages and salaries, (b) social security costs, (c) other pension costs
  7. (a) Depreciation and other amounts written off fixed assets; (b) amounts written off current assets beyond normal write offs
  8. Other operating expenses

The same investment income, interest, tax and profit lines then follow. Two lines need care. The change in stocks adjusts for goods made but not sold, or sold from opening stock, because Format 2 records the costs of production rather than the cost of goods sold. Own work capitalised adds back the cost of staff and materials used to build the company’s own fixed assets, since those costs are already included in the expense lines. Format 2 needs no allocation judgements, which suits service businesses whose main cost is staff.

What does each format disclose, and what moves to the notes?

Information Format 1 Format 2
Gross profit On the face Not shown
Staff costs Within functions On the face, split three ways
Depreciation Within functions On the face
Distribution and administration costs On the face Not shown

For medium and large companies the law fills the gap. The note to Format 1 in SI 2008/410 requires the depreciation and diminution in value that Format 2 would show at item 7(a) to be disclosed in a note. Section 411(5) of the Companies Act 2006 requires companies outside the small companies regime to disclose total staff costs split between wages and salaries, social security costs and other pension costs. Small companies are spared both: the Format 1 depreciation note was omitted from the small company Schedule by SI 2015/980, and section 411(5) does not apply to them, although every company must disclose its average number of employees under section 411(1). The depreciation figure still has to be worked out under the chosen depreciation method.

What applies whichever format is used?

  • Paragraph 6 of Schedule 1 requires profit or loss before taxation to be shown.
  • Notes (12) and (13) require income, interest and interest payable involving group undertakings to be shown separately.
  • Paragraph 5.7D of FRS 102 requires turnover on the face of the income statement.
  • Paragraph 5.10 forbids describing any item as extraordinary for companies using these formats.
  • Material items must be disclosed separately under paragraph 5.9A, and small entities must give the amount and nature of items of exceptional size or incidence under paragraph 1AC.32.
  • Paragraph 2 of Schedule 1 requires the same format each year unless the directors consider there are special reasons for a change, with particulars and reasons disclosed in a note.

Can a small company abridge or adapt the profit and loss account?

A small company can abridge, with the consent of all members, under paragraph 1A(2) of its Schedule. Items 1, 2, 3 and 6 of Format 1, or items 1 to 5 of Format 2, are combined into one line called gross profit or loss. That means other operating income is folded into gross profit, and turnover disappears from the face. Paragraph 1AB.2 of FRS 102 says abridged accounts must still give a true and fair view and gives disaggregating gross profit and disclosing turnover as examples of what the notes may need. Abridgement is not available to charities. The filing consequences are on the small company filing options page.

Any company can adapt a format under paragraph 1A(2) of SI 2008/410, or paragraph 1B(2) for small companies, provided the information is at least equivalent and the presentation follows generally accepted accounting practice. Until 2027, FRS 102 paragraph 5.5B sets the minimum lines as revenue, finance costs, share of associates and joint ventures, profit or loss before taxation, tax, discontinued operations and profit or loss, with an analysis of expenses equivalent to the statutory format given on the face or in the notes. Small entities follow paragraph 1AB.3.

What changes for adapted formats from 1 January 2027?

The FRC’s February 2026 amendments, reflecting IFRS 18, replace those minimum lines for periods beginning on or after 1 January 2027, with early application permitted. New paragraph 5A.4 requires operating expenses analysed by nature, by function or both, an operating profit or loss line, and a profit or loss before financing and taxation line. Paragraph 5A.5 drops that last line where non customer finance income or expenses are presented within operating profit. The changes affect only entities that adapt; companies using Format 1 or Format 2 as set out in law are unaffected.

How do the same figures look in each format?

Illustration only. A manufacturer has turnover of £1,000,000 and no change in stocks. It spends £400,000 on materials and £350,000 on staff (£200,000 production, £50,000 delivery, £100,000 office), has depreciation of £50,000 (£40,000 production, £10,000 office) and other expenses of £100,000 (£60,000 delivery, £40,000 office).

Format 1 £ Format 2 £
Turnover 1,000,000 Turnover 1,000,000
Cost of sales (640,000) Raw materials and consumables (400,000)
Gross profit 360,000 Staff costs (350,000)
Distribution costs (110,000) Depreciation (50,000)
Administrative expenses (150,000) Other operating expenses (100,000)
Operating profit 100,000 Operating profit 100,000

The profit is identical; only the analysis differs. Format 1 tells the reader the gross margin is 36 per cent, while Format 2 tells them staff are 35 per cent of turnover.

What mistakes come up?

  • Mixing the two analyses, for example showing cost of sales alongside a separate staff costs line.
  • Changing format, or the allocation of costs between functions, without restating and explaining the comparatives.
  • Labelling unusual items as extraordinary.
  • Forgetting the depreciation and staff cost notes a medium sized company needs under Format 1.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.