Profit and Loss Statement (P&L)
A profit and loss statement, or P&L, shows how much money a business earned and spent over a period, such as a month or a year, and what was left. It lists income, subtracts the cost of goods sold and operating expenses, and ends with net profit or loss. It is also called an income statement.
What P&L means
P&L is short for profit and loss, and the phrase turns up in three places. Most often it means the report on this page: a statement of what a business earned and spent over a period. In job ads, "P&L responsibility" means a manager answers for the income and costs of a team, a store or a product line, and is judged on its bottom line. Traders use "P&L" for the running gains and losses on their positions, which works more like a scoreboard than a report. On this site, P&L always means the statement.
The statement goes by other names as well. Accountants and public companies often call it an income statement or a statement of operations, while small business owners, lenders and bookkeepers usually say profit and loss statement. The content does not change with the name: income, the costs of earning it, and what is left.
What is on a profit and loss statement
Here is a short statement for a made-up bakery covering one quarter. The markers point at the six parts every P&L has, from the period at the top to net profit at the bottom.
| Line | Amount |
|---|---|
| Income | |
| Sales | 48,250.00 |
| Cost of goods sold | 17,370.00 |
| Gross profit | 30,880.00 |
| Expenses | |
| Wages | 14,600.00 |
| Rent | 6,000.00 |
| Utilities and phone | 1,420.00 |
| Card processing fees | 1,330.00 |
| Insurance | 540.00 |
| Advertising | 460.00 |
| Repairs and maintenance | 310.00 |
| Total expenses | 24,660.00 |
| Net profit | 6,220.00 |
Not accounting, tax or legal advice. Check every figure before you sign or submit it. Some lenders require a statement prepared by an accountant.
The period. July 1 to September 30. A P&L always covers a span of time, never a single day.
Income. The bakery's sales for the quarter. Some statements split income into several lines, such as counter sales and catering.
Cost of goods sold. Flour, butter, sugar, boxes and the other ingredients and packaging that went into what was sold.
Gross profit. Sales minus the cost of goods sold: what the baking itself earns before the shop's running costs.
Expenses. Wages, rent, utilities, card fees and the other costs of keeping the shop open.
Net profit. Gross profit minus expenses. This is the figure owners, lenders and tax preparers look at first.
The P&L formulas
Two subtractions do almost all the work on a P&L. Here they are with the bakery's figures.
| Sales | 48,250.00 |
| Cost of goods sold | 17,370.00 |
| Gross profit | 30,880.00 |
Gross profit is income minus the cost of goods sold. Divide it by income and you get the gross margin: 30,880.00 out of 48,250.00 is 64.0%.
| Gross profit | 30,880.00 |
| Total expenses | 24,660.00 |
| Net profit | 6,220.00 |
Net profit is gross profit minus expenses. Divided by income it gives the net margin: 6,220.00 out of 48,250.00 is 12.9%.
Larger companies add steps in between, such as operating income and income before taxes. That layout is called a multi step income statement, and it reaches the same bottom line in more stages.
Reading a P&L
Start at the bottom line, then work up. A profit says the period paid for itself; a loss says to look for the lines that grew. Next, compare the gross margin with the same period last year. If it fell, your prices did not keep up with what you pay for materials or products. Then scan the expense lines for anything that jumped, such as software subscriptions that multiplied or a new fee from a payment processor. Finally, check the statement against the bank: income on the P&L should sit close to business deposits once transfers and loans are taken out. If it is far off, something was counted twice or left out.
What is not income or an expense
A P&L built from bank records goes wrong most often on transactions that move money without earning or spending it. None of these belong on the statement.
- Transfers between your own accounts. Moving money from checking to savings, or from a payment app to the bank, is not income when it lands.
- Credit card payments. The purchases on the card are the expenses. Counting the payment from checking as well would count them twice.
- Loan principal. Repaying what you borrowed is not a cost of the business. Only the interest is an expense.
- Loan money you receive. A loan deposit adds cash, but it is not income, because you have to pay it back.
- Owner draws and contributions. Money you take out for yourself, or put in from your own pocket, moves between you and the business without changing its profit.
Leave each of these off the statement but keep the records, because a lender or your tax preparer may ask to see them.
How to make a profit and loss statement
Choose the period and the method
Pick the dates, such as last month or January 1 to today, and decide between cash basis (money in and out of the bank) and accrual (money earned and owed).
Gather bank and card records
Download a CSV file or a statement for every business account for the same dates, including credit cards and payment apps.
Sort each transaction into a category
Put sales in income, materials in cost of goods sold, and everything else under an expense heading such as rent, software or advertising.
Leave out the items above
Take out transfers, card payments, loan principal, loan money and owner draws so they do not inflate income or costs.
Total and check against the bank
Add each category, subtract to reach net profit, and compare the result with the change in your bank balances. A large gap usually means a missing account or a transfer counted as income.
A template does the adding once you have the totals. The bank statement tool also does the sorting, from the CSV files your bank provides, and it never uploads them.
P&L, balance sheet and cash flow statement
| Statement | What it shows | Time frame | Main question |
|---|---|---|---|
| Profit and loss statement | Income, costs and the profit or loss | A period, such as a month or a year | Did the business make money? |
| Balance sheet | What the business owns, what it owes and the owner's equity | A single date | What does the business own and owe? |
| Cash flow statement | Cash coming in and going out, by source | A period | Where did the cash go? |
The three connect. Net profit from the P&L adds to equity on the balance sheet, and the cash flow statement explains why a profitable business can still run short of cash, for example when customers pay late or a loan payment comes due.
Use the P&L when the question is whether the business made money over a month, a quarter or a year. Use the balance sheet when someone asks what the business owns and owes on a given day, and the cash flow statement when the bank balance does not match the profit. A lender often asks for the first two together.
Who prepares a P&L, and how often
In a small business the owner or a bookkeeper usually prepares the P&L, from the same bank and card records that feed the tax return. Larger businesses have an accountant close the books each month and produce it as part of a set of statements.
How often depends on who reads it. For your own decisions, a monthly P&L is the most useful, because it is recent enough to act on. Your tax preparer needs a full year. A lender usually wants the last full year plus the year to date, and some ask for statements prepared or reviewed by an accountant. A partner or investor may expect one every quarter. Whatever the rhythm, keep the same categories from one statement to the next so the periods compare cleanly.
Cash or accrual
On a cash basis, income counts when the money arrives and expenses count when you pay them. A P&L built from bank statements is a cash basis P&L, which is why it is quick to prepare and easy to check against the bank.
On an accrual basis, income counts when you earn it and expenses count when you owe them, whether or not money has moved. An invoice sent in March is March income even if the client pays in April. Accrual shows the timing of the business more closely, but it needs records of what customers owe you and what you owe suppliers.
Ask your tax preparer which method your returns use, and use the same one on your P&L so the two line up.
Questions
What does P&L stand for?
P&L stands for profit and loss. It is the report that lists a business's income and expenses for a period and shows the profit or loss that is left. In a job description, "P&L responsibility" means the person answers for the results of a business unit, not that they type up the report.
Is a P&L the same as an income statement?
Yes. A profit and loss statement and an income statement are the same report under two names, and "statement of operations" is a third name you may see. Small businesses tend to say P&L, while accountants and annual reports often say income statement. Our income statement template uses the standard format with gross profit and operating income.
What is the difference between a P&L and a balance sheet?
A P&L covers a period of time and shows what the business earned and spent in it. A balance sheet shows a single date and lists what the business owns, what it owes and the owner's equity on that day. The two connect, because net profit for the year adds to equity. Our balance sheet template has a check cell that shows when it does not balance.
How often should a small business make a P&L?
Monthly is a common rhythm, because it shows a problem while there is still time to act on it. At a minimum you need a full year for your tax return, and lenders often ask for a year to date statement as well. Whatever you choose, use the same categories every time so the periods compare cleanly.
Do transfers, loans and owner draws go on a P&L?
No. Moving money between your own accounts, receiving a loan, paying back loan principal and taking an owner draw all change your bank balance without earning or spending anything. Leaving them out keeps the profit figure honest. The one exception is loan interest, which is a cost of borrowing and belongs in expenses.
Can a profit and loss statement show a loss?
Yes. When expenses are larger than income for the period, the bottom line is a net loss, written in parentheses, such as (3,690.00). A loss is common in a first quarter or a slow season and should be reported as it is. The painting contractor in our profit and loss statement examples shows how a loss looks on the page.