Published Tuesday 7 July 2026

Table of contents

Key takeaways

What is a profit and loss statement?

A profit and loss statement (also called an income statement or P&L) is a financial report that summarises your business income, costs and expenses over a specific period. It shows whether your business made a profit or a loss during that time. You can also explore a profit and loss statement example to see how it looks in practice.

You can prepare a profit and loss statement monthly, quarterly or annually. Most small business owners run one at least quarterly to keep track of performance and prepare for tax time. The Australian Taxation Office (ATO) expects you to keep accurate financial records, and a profit and loss statement is one of the core reports that supports your tax return and Business Activity Statement (BAS) lodgement. It sits alongside other financial statements that together paint a full picture of your business finances.

A profit and loss statement matters because it turns your day-to-day transactions into a single, readable summary. Instead of guessing whether your business is profitable, you can see exactly where your money comes from and where it goes.

What's included in a profit and loss statement?

A profit and loss statement breaks down your business finances into a few key categories. Each one builds on the last, so you can trace a clear path from total income to your bottom line.

Revenue (income)

Revenue is the total income your business earns from selling goods or services before any costs are subtracted. This is sometimes called your "top line." It includes all sales, fees and other operating income recorded during the reporting period.

Cost of goods sold (COGS)

Cost of goods sold covers the direct costs of producing or delivering what you sell. For a retailer, this might include the wholesale cost of stock. For a service business, it could include the direct labour costs tied to delivering that service.

Gross profit

Gross profit is your revenue minus cost of goods sold. It tells you how much money is left after covering the direct costs of what you sell, before accounting for operating expenses like rent, utilities and wages.

Operating expenses

Operating expenses are the ongoing costs of running your business that aren't directly tied to producing goods or services. Common examples include rent, utilities, insurance, marketing, office supplies and wages. According to Xero Small Business Insights, Australian small businesses recorded sales growth of 6.7% year on year in the December quarter of 2025, while wages, a major expense line, grew by 2.0% over the same period.

Net profit (or net loss)

Net profit is what remains after subtracting all expenses, including COGS, operating expenses, interest and tax, from your total revenue. This is your "bottom line." You can learn more about how net profit is calculated and why it matters. If expenses exceed revenue, the result is a net loss.

How to prepare a profit and loss statement

Preparing a profit and loss statement is straightforward once you have your financial records in order. Follow these steps to build one from scratch or check the figures in your accounting software.

1. Gather your financial records

Start by collecting all the records you need: bank statements, invoices, receipts and any other documentation of income and expenses. If you use Xero accounting software, your bank transactions are pulled in automatically through bank feeds, which saves time on data entry.

Make sure your records cover the full reporting period you want to analyse, whether that's a month, a quarter or a financial year. If you'd rather skip the manual setup, you can also download a profit and loss statement template to get started quickly.

2. Choose your reporting period

Decide the time frame your profit and loss statement will cover. Monthly reports help you track short-term trends. Quarterly reports align with BAS lodgement periods. Annual reports give you the full picture for your tax return.

The period you choose depends on what you need the report for. If you're reviewing performance, monthly or quarterly works well. For tax preparation, you'll need a full financial year report (1 July to 30 June in Australia).

3. Calculate your total revenue

Add up all income your business earned during the reporting period. Include sales of goods and services, interest income, and any other operating income. Make sure you're recording revenue when it's earned, not just when payment is received.

Your P&L statement will include all sales, including credit sales that your customers might not have paid yet. It will also include bills for expenses that you have incurred but not paid. Xero Small Business Insights data shows Australian small businesses waited an average of 23.9 days to be paid in the December quarter of 2025, with late payments averaging 6.6 days past due.

4. Calculate cost of goods sold

Work out the direct costs associated with the goods or services you sold during the period. This typically includes raw materials, direct labour and any other costs directly tied to production or delivery.

Subtract your COGS from your total revenue to get your gross profit. This figure tells you how efficiently you're producing or sourcing what you sell.

5. List your operating expenses

Record all the other costs of running your business during the period. Group them into categories such as rent, utilities, insurance, marketing, office supplies, wages and salaries, and professional fees.

Keeping your expenses organised by category makes it easier to spot where you're spending the most and where you might be able to cut costs.

6. Calculate your net profit

Subtract your total operating expenses from your gross profit. Then subtract any interest, depreciation and tax to arrive at your net profit (or net loss).

This is your bottom line: the amount your business actually earned (or lost) during the period. If you use Xero, you can run a profit and loss report directly from the platform and compare it across periods to track your progress.

How to read a profit and loss statement

Knowing how to read a profit and loss statement helps you move from simply producing a report to actually using it to make better business decisions.

Check your profit margins

Your gross profit margin shows how much you keep from each dollar of revenue after covering direct costs. Your net profit margin shows what's left after all expenses. If your gross margin is healthy but your net margin is thin, your operating expenses may be too high relative to your income.

Compare periods

Look at your profit and loss statement alongside previous periods: month on month, quarter on quarter, or year on year. This comparison reveals whether your revenue is growing, whether expenses are creeping up, and whether your profitability is improving or declining.

Spot trends and red flags

Watch for patterns that signal a problem. A rising revenue line paired with a shrinking net profit could mean your costs are growing faster than your sales. A sudden spike in a single expense category might point to an error or an unexpected cost that needs attention.

Regular review is what turns a profit and loss statement from a compliance document into a practical planning tool. Even a quick monthly check can help you adjust pricing, manage cash flow and plan for quieter periods.

Profit and loss statement vs balance sheet vs cash flow statement

A profit and loss statement is 1 of 3 core financial statements. Each serves a different purpose, and together they give you a complete view of your business finances.

Profit and loss statement

Shows your income, expenses and profit (or loss) over a set period. It answers the question: did the business make money during this time?

Balance sheet

Shows what your business owns (assets), what it owes (liabilities) and the owner's equity at a single point in time. It answers the question: what is the business worth right now? You can learn more about how a balance sheet works alongside your P&L.

Cash flow statement

Shows the actual movement of cash in and out of your business over a period. It answers the question: does the business have enough cash to pay its bills? A business can be profitable on its P&L but still run short on cash if customers are slow to pay or large expenses are due. Understanding your cash flow helps you avoid that gap.

Reviewing all 3 statements together gives you a more accurate picture than relying on any single report. Your P&L tells you about profitability, your balance sheet tells you about financial position, and your cash flow statement tells you whether you can meet your obligations day to day.

Common profit and loss statement mistakes to avoid

Even small errors in a profit and loss statement can lead to poor decisions or compliance issues. Here are the most common mistakes to watch for.

Stay on top of your profit and loss with Xero

A clear, accurate profit and loss statement helps you understand your business performance, plan ahead and stay on top of your tax obligations. With Xero accounting software, you can generate a profit and loss report in a few clicks, compare periods side by side, and share it with your accountant or bookkeeper directly from the platform.

Try Xero and see how simple it is to keep your finances organised. Get one month free.

FAQs on profit and loss statements

Here are answers to some common questions about profit and loss statements.

What is the difference between a profit and loss statement and an income statement?

There is no difference. "Profit and loss statement" and "income statement" are 2 names for the same report. Both show your revenue, expenses and net profit or loss over a specific period.

How often should you prepare a profit and loss statement?

Most small businesses benefit from preparing a profit and loss statement at least quarterly, which aligns with BAS lodgement periods in Australia. Monthly reports are useful if you want to track trends more closely or make timely adjustments to your spending.

What is the difference between gross profit and net profit?

Gross profit is your revenue minus the direct costs of producing your goods or services (COGS). Net profit is what's left after subtracting all remaining expenses, including operating costs, interest and tax, from your gross profit.

Can you prepare a profit and loss statement yourself?

Yes. You can prepare a profit and loss statement using a spreadsheet or accounting software like Xero. If your finances are complex or you're unsure about classifications, working with an accountant or bookkeeper can help ensure accuracy.