What Is a Profit and Loss Statement? How to Read a P&L

A profit and loss statement, often shortened to P&L and also called an income statement, summarises a business's revenue and expenses over a set period, such as a month, quarter or year, and shows whether the result was a profit or a loss. It reads from top to bottom like a funnel: everything the business earned at the top, the costs subtracted in stages, and what is left at the bottom.

The lines, from top to bottom

1. Revenue (sales or turnover): income from the business's main activity during the period, usually after refunds and discounts.
2. Cost of goods sold (COGS) or cost of sales: the direct cost of what was sold, such as materials, stock bought for resale or subcontracted work tied to specific jobs.
3. Gross profit: revenue minus cost of sales.
4. Operating expenses: the costs of running the business that do not rise directly with each sale, such as rent, salaries, marketing, software, insurance and repairs.
5. Operating profit: gross profit minus operating expenses.
6. Other income and costs: items outside normal trading, such as interest paid on a loan or interest earned on savings.
7. Profit before tax, then tax, then net profit - the bottom line.

A simple example

The figures below are invented for illustration and describe one quarter of a hypothetical small business.

Gross profit vs net profit

These two figures answer different questions, and confusing them leads to poor decisions.

• Gross profit shows whether the core offer is priced well against its direct costs. If it is thin, selling more will not fix the business, because each extra sale contributes little toward overheads. Pricing levers such as markup and margin act on this line first.
• Net profit shows what remains after every cost, interest and tax. It reflects how efficiently the whole operation runs, not just the product.

Gross profit also matters outside the P&L itself. Insurers often base the limit on business interruption insurance on gross profit or revenue estimates, so an accurate figure helps avoid being under-insured.

How to read one in five steps

1. Check the period and basis. Is this a month, quarter or year, and is it prepared on a cash or accrual basis? The same business can look quite different under each, as our guide to cash vs accrual accounting shows.
2. Compare, do not just read. A single P&L says little on its own. Put it beside the same period last year and the previous period.
3. Turn lines into percentages of revenue. Gross margin and operating margin reveal trends that raw amounts hide when sales grow or shrink.
4. Look for costs rising faster than revenue. A subscription that crept up, wages growing ahead of sales, or repair bills that keep reappearing. Regular upkeep usually costs less than breakdowns, a point our article on maintaining production machinery makes in detail.
5. Separate one-off items. A large one-time expense or windfall can hide the underlying trend. Note it and read the rest without it.

What a P&L does not tell you

A profitable P&L does not mean there is cash in the bank. Under accrual accounting, sales appear as income before customers pay; loan repayments of principal and purchases of equipment do not appear as expenses in full in the period they are paid. For that reason the P&L is read together with a balance sheet, which shows what the business owns and owes at a point in time, and a cash flow statement, which tracks actual money in and out.

Mistakes to avoid

• Mixing personal spending into business expenses, which understates profit.
• Putting direct job costs in operating expenses, or the reverse, which distorts gross margin.
• Treating owner withdrawals as an expense in a sole proprietorship; they are usually recorded as drawings, not costs.
• Producing a P&L only once a year, when it is too late to act on anything it shows.

Common questions

How often should a small business produce a P&L?

Monthly is a sensible rhythm for most, with a quarterly review that compares results to the same quarter a year earlier. Monthly figures depend on the books being current, which our guide to bookkeeping basics covers.

Is a P&L the same as a budget?

No. A budget is a plan for future income and costs; a P&L records what actually happened. Laying the two side by side shows where reality departed from the plan.

Is an income statement different from a P&L?

They are two names for the same statement. Larger organisations and formal accounts tend to say income statement; owners and managers often say P&L.

General information, not accounting advice. For statements used in tax filings, loan applications or investment decisions, work with a qualified accountant.