What Is a Profit and Loss Statement? (and How to Create One)

Most business owners understand they need to track income and expenses. They might even need to give financial statements to investors or lenders. But few are comfortable preparing or interpreting those financial statements beyond a cursory glance at the bottom line.

To help you understand your company’s financial statements, this blog provides an overview of one essential financial statement: The Profit and Loss Statement. We’ll also show you how to prepare one and utilize the information it contains.

What Is a Profit and Loss Statement?

A Profit and Loss Statement, also known as the P&L or Income Statement, is one of the three primary financial reports. You usually get one along with a Balance Sheet and a Cash Flow Statement.

The P&L summarizes your business’s revenues, cost of goods sold, expenses for a specific period—usually a month, quarter, or year. The bottom of your P&L shows your net profit for the year (that’s where the term “bottom line” comes from!).

What Is the Difference Between a Profit and Loss (P&L) and a Balance Sheet?

While the P&L shows you what your business earned over a given period, the Balance Sheet shows what the business owes and owns at a specific point in time. In accounting terminology, it shows your company’s assets and liabilities as of a particular date. The difference between assets and liabilities is shareholder equity.

Both financial statements are essential for tracking your business’s financial health. Your Balance Sheet shows the company’s financial position, while the Profit and Loss Statement shows your overall performance, or profitability, for the accounting period.

What Are the Key Components of a Profit & Loss Statement?

 Every Profit and Loss Statement includes four key components:

1. Revenues. Revenues are the total income generated by sales of your company’s products or services.
2. Cost of Goods Sold. Costs of Goods Sold (COGS) are the direct costs of producing the goods or services you sell. They can include products purchased for resale, direct materials and labor related to producing or selling goods and services, and shipping and freight costs.
3. Expenses. Expenses are the costs your business incurs to generate revenues, other than the direct costs of producing and selling your products and services. The type of operating costs your business generates may vary but generally include salaries and wages for executives and other administrative staff members, rent, utilities, insurance, marketing and advertising, legal and professional fees, office supplies, and more.
4. Net Income (or Net Loss). After paying all costs of goods sold and expenses, the total revenue left over is your net income, also known as net profit. If the result is a negative number, you have a net loss.

Simply put, every Profit and Loss Statement follows the same basic formula:

Revenues - Costs - Expenses = Net Income or Loss

What Does a Profit & Loss Statement Tell You About Your Business?

Many small business owners only prepare a Profit and Loss Statement to satisfy lender requirements, file annual reports, or prepare tax returns for the IRS. But a P&L can be a valuable tool for staying on top of your business finances.

Periodically preparing a P&L allows you to take stock of your company’s income and expenses and keep an eye on profitability. You may use a P&L to:

• Look for ways to improve your bottom line by adjusting business operations, increasing revenues, or cutting expenses
• Compare month-over-month or year-over-year numbers to identify trends or look for unexpected variances
• Calculate key performance indicators (KPIs) and metrics and compare them to industry benchmarks

How To Create a Profit & Loss Statement

If you use cloud-based accounting software that tracks your business’s revenues, costs, and expenses, then creating a P&L is as easy as running a profit and loss report.

If you don’t use accounting software, manually creating a profit and loss statement takes more work. Here’s the basic process.

Step 1: Choose a timeframe

Most P&L statements cover a month, quarter, or year. Preparing a P&L for anything less than one month probably won’t yield any meaningful data. On the other hand, digging into years and years of data to prepare a P&L for several years would be overwhelming.

Step 2: Gather your financial information

Gather information on your business’s revenues and expenses for the accounting period. This step might be easy if you’ve tracked this information on a spreadsheet. Otherwise, you’ll need to spend some time gathering the information from bank statements, credit card statements, receipts, and invoices.

Step 3: Use a P&L Statement template

Profit and Loss Statements tend to follow a standard layout. You can either follow an example you find online or download our template below to save time.

Step 4: List your revenues

You can lump all revenues together on one line or break them into subcategories if that would be helpful to readers of the financial statements.

Step 5: List your cost of goods sold

You can lump all costs of goods sold on one line or break them into subcategories. Then, calculate your gross profit by subtracting costs of goods sold from revenues and show the result as a subtotal.

Step 6: List your expenses

Create categories for different expenses, such as rent, utilities, salaries and wages, office expenses, etc. Don’t show interest, taxes, depreciation, or amortization expenses here, as you’ll account for them later. Subtract total expenses from your gross profit. The result is your earnings before interest, taxes, depreciation, and amortization (EBITDA).

Step 7: List interest, taxes, depreciation, and amortization

Every small business doesn’t list interest, taxes, depreciation, and amortization separately on its financial statements. However, breaking out these items separately on the P&L can be helpful because it shows the company’s earnings without the impacts of financing, government, and accounting decisions.

Step 8: Calculate net income or loss

To arrive at net income, subtract interest taxes, depreciation, and amortization from EBITDA.

Profit and Loss Statement Template

If you don’t use accounting software to generate your Profit and Loss Statement, using a P&L template can save you time and effort versus preparing one from scratch.

Download our Profit and Loss Statement template and use it to create a profit and loss report in Excel or Google Sheets.

Whether or not your business is required to prepare a Profit and Loss Statement, it can be a valuable tool for reviewing your net income and making business decisions.

If you don’t feel comfortable tackling a P&L yourself, consider using cloud-based accounting software like QuickBooks, Xero, or Sage Intacct. Those solutions can automate the steps we outlined above to simplify creating a P&L.