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A profit and loss statement summarizes a business's revenue and expenses. Learn how to use a profit and loss statement to gain information about your business.
At some point, you’ve probably heard the phrase, “It takes money to make money.” But if you’re not careful, it’s easy for expenses to spiral out of control — and you could end up making little to no profit. That’s why every business should track revenue and expenses with a profit and loss (P&L) statement. A P&L statement helps you measure your company’s financial health and see how your business is really performing.
Here’s a look at what a P&L statement is, what it includes, and how to use one to gain valuable insights into your business.
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A P&L statement is a financial report that summarizes a company’s revenue, expenses and profit or loss over a fiscal year or quarter. When you read a P&L statement, you’ll see whether the company is generating sales, managing expenses and earning a profit.
The two main categories outlined in a P&L statement are income and expenses. Income includes things like product sales, interest earned, commissions and rental income. Expenses include the cost of goods sold (COGS), marketing and advertising fees and taxes.
“A P&L statement is important for businesses because it gives them a picture of how their business is doing during a given period of time,” explained Jackie Rockwell, co-founder of Brass Jacks, an online bookkeeping academy. “Business owners are often most interested in the bottom line — what is left over after the expenses have been subtracted from the income.”
P&L statements typically follow one of two formats: single-step or multistep. The type you’ll use depends on your business size, complexity and reporting needs.
There are two common methods of preparing P&L statements: cash accounting and accrual accounting.
A P&L statement is a straightforward and insightful tool that shows how your business is doing financially over a set period. Whether you’re creating one from scratch or reviewing a report generated by your accounting software, here’s how to build and understand a P&L statement.
Start by selecting the time frame you want to review — usually monthly, quarterly or annually. This period will define which income and expenses you include in the report.
List all sources of income during the reporting period. This includes revenue from your core business activities (like selling products or services) and nonoperating income (like interest earned or the sale of business assets).
This is the top line of your P&L.
Next, determine the direct costs involved in producing your goods or services. This might include materials, production labor or product packaging. If you run a service business, COGS may include things like subcontractor fees or the cost of billable labor.
Use this formula to calculate COGS:
Beginning Inventory + Purchases – Ending Inventory = COGS
Although COGS is an expense, it’s listed separately for tax purposes — the IRS allows you to deduct COGS from your income before calculating taxable profit.
Next, you’ll find your gross profit with this formula:
Revenue – COGS = Gross Profit
This number shows how much you made from sales after covering direct production costs. It’s a key indicator of your business’s core profitability.
Now, list your day-to-day operating expenses. These include overhead costs like rent, marketing, utilities, payroll, office supplies, insurance and software.
These costs are necessary to run your business but don’t directly generate revenue.
Next, you’ll subtract your operating expenses from gross profit to find your net income.
Gross Profit – Expenses = Net Income
This is your “bottom line” — what’s left after covering all your business costs. Depending on your accounting method and reporting format, your P&L may also include additional deductions like interest, taxes, depreciation and amortization. If your net income is positive, you’ve earned a profit. If it’s negative, your business has taken a loss during the reporting period.
Reading a P&L isn’t just about plugging in numbers — it’s about understanding what they say.
Ask yourself the following questions when reviewing your P&L statement:
Your P&L can help you spot patterns, adjust your budget and make smarter financial decisions moving forward.
While we’ve already walked through how to create a P&L, it’s helpful to see everything that might appear on one — all in one place. Depending on how detailed your report is, a profit and loss statement may include:
A P&L focuses only on income and expenses for a specific period. It doesn’t include your business’s assets, liabilities, or equity — those appear on your balance sheet.
Below is a copy of General Motors’ 2018-2020 P&L statement, which the company refers to as its consolidated income statement.
If you’re not a publicly traded company with shareholders to report to, you may wonder whether creating a profit and loss statement is necessary. However, Rockwell emphasized that every company should review its P&L regularly to support smarter business decision-making.
“While public companies are required to report their financials, private businesses rely on P&Ls for internal decision-making,” Rockwell explained. “Sometimes it is tempting to just watch the bank balance, but that doesn’t tell the full story. A P&L helps business owners understand where the company is spending its money and if a pivot needs to occur in order to stay profitable.”
Here are several crucial reasons all businesses should track their profits and losses:
Creating a P&L statement isn’t difficult, and you can certainly do it on your own. However, the process becomes much easier — and more accurate — when you use accounting software. The right platform can help you avoid common accounting challenges and costly accounting mistakes.
With accounting software, your revenue and expenses are tracked automatically and consistently. That means you can generate a professional P&L statement with just a few clicks at the end of the quarter or year.
Here are a few great options to consider:
A P&L statement provides an overview of how much your business is earning and whether you’re making or losing money. Businesses of all sizes can benefit from creating and reviewing a P&L statement regularly.
If you’re new to P&L statements, you can start with a template or consider investing in feature-rich accounting software. Platforms like QuickBooks Online and Xero make it easy to track expenses and generate a P&L statement in seconds. That way, you can stay on top of your finances and be better prepared for tax season.