What Is a Profit and Loss Statement?

What is a P&L statement?

A P&L statement is a financial report that summarizes a company’s revenue, expenses and profit or loss over a specific reporting period, such as a month, quarter or fiscal year. 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.”

Types of profit and loss statements

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.

• Single-step P&L statement: This format simplifies the process by grouping all income and gains together and all expenses and losses together. Then, it subtracts total expenses and losses from total income and gains to show net profit or loss. Single-step P&L statements are common for small businesses that don’t need to break out operating income separately.
• Multistep P&L statement: This format provides a more detailed view by separating operating income from nonoperating income and expenses. It includes subtotals like gross profit and operating income, giving a clearer picture of core business performance. Larger businesses or companies that follow generally accepted accounting principles (GAAP) typically use multistep statements.

P&L statement preparation methods

There are two common methods of preparing P&L statements: cash accounting and accrual accounting.

• Cash: This is the most straightforward method, as it measures the actual cash going in and out of a business. It records income when it’s received and expenses when they’re paid. This method is popular among solopreneurs and small businesses because it’s simple and easy to understand.
• Accrual: In contrast, the accrual method records revenue when it’s earned and expenses when they’re incurred — regardless of when cash is exchanged. For example, if you deliver a product to a customer but haven’t been paid yet, the accrual method still recognizes the revenue on your P&L. Companies that follow GAAP are required to use accrual accounting.

How to create and read a profit and loss statement

A P&L statement is a straightforward and insightful tool that shows how your business is performing financially over a set period. Whether you’re building one from scratch or reviewing a report generated by your accounting software, here’s how to create and interpret a P&L statement.

1. Choose a reporting period.

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.

2. Calculate your revenue.

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 gains from the sale of business assets).

This is the top line of your P&L.

3. Calculate your cost of goods sold (COGS).

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 billable labor tied directly to client work, while general employee salaries are typically treated as operating expenses.

For inventory-based businesses, a basic COGS formula is:

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. This distinction matters when you’re preparing your annual tax return or applying for a business loan.

4. Subtract COGS from revenue to find your gross profit.

Next, you’ll find your gross profit with this formula:

Revenue – COGS = Gross Profit

This number shows how much you earned from sales after covering direct production costs. It’s a key indicator of your business’s core profitability.

5. List and total your operating expenses.

Now, list your day-to-day operating expenses. These include overhead costs like rent, marketing, utilities, payroll, office supplies, insurance and software.

These are the costs required to keep your business running day to day. They aren’t directly tied to producing the goods or services you sell, but they’re essential to operations.

6. Subtract expenses from gross profit to find your net income.

Next, you’ll subtract your operating expenses — along with any additional costs, such as interest payments or one-time expenses — from gross profit to find your net income.

Gross Profit – Expenses = Net Income

This is your “bottom line” — what remains after covering all your business costs. Depending on your accounting method and reporting format, your P&L may also reflect additional deductions like interest, taxes, depreciation and amortization. A positive net income means your business turned a profit; a negative figure means you operated at a loss during that period.

7. Review and analyze the results.

Reading a P&L isn’t just about the numbers; it’s about understanding what they say.

Ask yourself the following questions when reviewing your P&L statement:

• Are revenues increasing or decreasing?
• Are expenses under control?
• Are certain cost areas eating into your profit?

Your P&L can help you spot patterns, adjust your budget and make smarter financial decisions moving forward.

What is included in a P&L statement?

Now that we’ve covered how to create a P&L, it helps to see everything that might appear on one in a single view. Depending on how detailed your report is, a profit and loss statement may include:

• Total revenue
• Cost of goods sold (COGS)
• Gross profit
• Operating expenses
  1. Selling, general and administrative (SG&A) expenses
  2. Marketing and advertising costs
  3. Research and development (R&D) expenses
• Depreciation and amortization
• Interest paid
• Taxes (e.g., income taxes)
• Earnings before interest, taxes, depreciation and amortization (EBITDA)
• Net income (profit or loss)

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.

Real-world example of a P&L

Below is a copy of Costco Wholesale Corporation’s 2025-2023 P&L statement, which the company refers to as its consolidated statement of income.

Why do businesses need to track P&L?

Even if you’re not a publicly traded company with shareholders to report to, creating and reviewing a profit and loss statement is still essential. 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 P&L:

• Tracking P&L reveals profitability: A P&L statement shows whether your business is profitable by revealing if you’re earning or losing money on the sale of your products or services. Regularly tracking this information can also help you spot opportunities to boost revenue or cut costs — and inspire new ideas to increase sales.
• Tracking P&L helps you spot trends: By reviewing your P&L regularly, you can identify patterns in your financial performance, compare them to industry trends and make decisions to improve your business. For example, if revenue is down, it may be time to find ways to boost sales. Another scenario could be if revenue is steady but net income is falling, which indicates it’s time to look for ways to cut business costs. “One of my favorite ways to look at a P&L is to look at an entire year and divide it up into quarters. This is a really easy way to see trends that occur throughout the year,” Rockwell noted.
• Tracking P&L helps you gauge your business’s health: If you ever apply for a small business loan, your lender will likely request financial documents like a P&L statement. This report gives them a snapshot of your business’s financial health and shows whether you’re earning a profit.

How accounting software can help manage your P&L statement

Putting together a P&L statement doesn’t have to be complicated, and plenty of business owners handle it themselves. That said, the right accounting software makes the process significantly faster, more accurate and far less prone to human error. The right platform can help you avoid common accounting challenges and costly accounting mistakes.

Good accounting software automatically tracks your revenue and expenses in real time and organizes them consistently, so when it’s time to review your financials, you can generate a polished, accurate P&L statement in just a few clicks — no manual number-crunching required.

Here are a few great options to consider:

• QuickBooks Online: QuickBooks Online offers a robust set of accounting tools for businesses of all sizes and stages. Its ability to generate reports like P&L statements is unparalleled. The platform automatically categorizes transactions and lets you monitor your company’s cash flow directly from the dashboard. Read our detailed QuickBooks Online review for more information.
• FreshBooks: FreshBooks is a cloud-based accounting platform you can access from any device. It’s an especially good option for freelancers or business owners who are not well-versed in accounting. The software uses double-entry accounting, so you can easily generate financial reports like P&L statements and better understand your business’s financial health. You can also invite your accountant to collaborate in your FreshBooks account. Our comprehensive FreshBooks review explains more.
• Xero: Xero is an affordable, flexible accounting platform with multiple plan options to fit different business needs. It includes all the essentials for new businesses, along with advanced features like payroll and inventory management. Xero helps you track expenses and monitor your real-time cash position. As explained in our Xero review, you can also use the software to generate financial reports and stay organized during tax season.
• Oracle NetSuite: Oracle NetSuite is an excellent choice for businesses that want to automate core accounting functions. You’ll only pay for the features you use, making it a smart option for small organizations planning to scale. The platform can reconcile transactions, manage accounts payable and receivable and generate detailed financial reports. Our updated Oracle NetSuite review shares more about this solution’s features and functionality.

P&L statements provide valuable insights into your business

A P&L statement provides an overview of how much your business is earning and whether it’s operating profitably. Businesses of all sizes can benefit from creating and reviewing a P&L statement regularly.

If you’re new to P&L statements, starting with a template is a practical first step, 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 minutes. That way, you can stay on top of your finances, make more informed decisions and be better prepared when tax season rolls around.