Profit and loss statement

Published Thursday 23 July 2026

Table of contents

• What is a profit and loss statement?
• What is a profit and loss statement used for?
• What's included in a profit and loss statement
• How P&L statements work
• Cash vs accrual: how your P&L records revenue and expenses
• How to create a profit and loss statement
• How to read your profit and loss statement
• Profit and loss statement example
• P&L statement vs cash flow statement
• Manage your profit and loss statement with Xero
• FAQs on profit and loss statements
• Related terms
• Learn more about profit and loss statements

Key takeaways

• A profit and loss statement, also called an income statement, shows how much your business earned and spent over a set period so you can see whether you made a profit or a loss.
• Your gross profit is revenue minus cost of goods sold, and your net profit is gross profit minus all other operating expenses and taxes, so keep the two figures distinct when you read your numbers.
• Review your P&L regularly to track profitability trends, spot rising costs, and make confident decisions about pricing, hiring, and spending.
• Accounting software builds your P&L from daily transactions, giving you real-time profitability without manual calculations.

What is a profit and loss statement?

A profit and loss statement, also called a P&L or an income statement, is a financial report that shows how much your business earned and spent over a specific period. It tells you whether you made a profit or a loss.

You can prepare a P&L for any timeframe, though most businesses create one monthly, quarterly, or annually.

Your P&L summarizes all income and expenses recorded during the reporting period. The basic formula is straightforward: total revenue minus total expenses equals your profit or loss.

Here's what a P&L statement tracks:

• Income: all sales revenue, including credit sales customers haven't paid yet
• Expenses: costs like payroll, advertising, rent, and insurance, including bills you've incurred but not yet paid
• Net income: a positive result, meaning you earned more than you spent
• Net loss: a negative result, meaning expenses were higher than revenue

Your P&L also helps you calculate profit margins, which show how efficiently your business turns revenue into profit.

What is a profit and loss statement used for?

A P&L statement shows you clearly how your business is performing, so you can decide how to spend, price, and grow. It turns your day-to-day numbers into insights you can act on.

Here's what you can use it for:

• Track profitability: see whether your business is making or losing money over time
• Prepare for tax season: provide accurate income and expense records for your return, since bodies like the Canada Revenue Agency require standardized financial data with specific codes for items reported on your income statement
• Apply for financing: show lenders and investors proof of your business performance
• Spot trends: identify which months are strongest and where costs are climbing
• Set goals: compare actual results against your budget to measure progress
• Make decisions: use real numbers to guide pricing, hiring, and spending

What's included in a profit and loss statement

A P&L statement has four main sections that work together to show how profitable your business is. For official tax filings, accountants break these sections into more detail: for example, the Canada Revenue Agency's General Index of Financial Information (GIFI) provides a list of about 100 commonly used income statement items for standardized reporting.

• Revenue: all money earned from sales and services during the reporting period
• Cost of goods sold (COGS): direct costs to produce or deliver what you sell, such as materials, manufacturing, or contractor fees
• Operating expenses: day-to-day costs of running your business, including rent, salaries, utilities, marketing, and insurance
• Net income or loss: the final figure after subtracting all costs from revenue

Some P&L statements also show gross profit, which is revenue minus COGS. That tells you how much you're making before you account for overhead costs.

How P&L statements work

A P&L statement follows a simple top-to-bottom flow that calculates your profit in stages. Each step strips out another layer of cost until you reach your bottom line.

1. Start with total revenue from all sales and income sources
2. Subtract cost of goods sold to get your gross profit
3. Subtract operating expenses from gross profit
4. The result is your net income (profit) or net loss

This structure shows you exactly where your money comes from and where it goes. If your net income is shrinking, you can trace the problem back to rising costs or falling revenue.

The timing behind those figures depends on your accounting method. Whether you record revenue and expenses when cash moves or when it's earned and incurred shapes what your P&L shows, so it's worth understanding the two approaches.

Cash vs accrual: how your P&L records revenue and expenses

Your accounting method decides when revenue and expenses land on your P&L. The two options are the cash method and the accrual method, and each gives you a different view of the same business.

The cash method records revenue and expenses only when money actually moves, so a sale shows up when the customer pays. The accrual method records revenue and expenses when they're earned or incurred, which is why a credit sale appears on your P&L before the payment reaches your account.

How to create a profit and loss statement

Creating a P&L statement means gathering your financial records and organizing them into the standard format. Follow these 7 steps to build one:

1. Choose your reporting period (month, quarter, or year)
2. Gather all revenue records, including invoices and sales receipts
3. Add up total revenue from all income sources
4. List all cost of goods sold for products or services delivered
5. Record all operating expenses, such as rent, salaries, utilities, and marketing
6. Subtract COGS from revenue to calculate gross profit
7. Subtract operating expenses from gross profit to get net income or loss

Accounting software like Xero automates this whole process. It pulls data from your daily transactions to generate real-time P&L statements, so you can check your profitability anytime without manual calculations.

How to read your profit and loss statement

Reading a P&L statement helps you understand what the numbers mean for your business. Here's what to look for:

• Revenue trends: compare revenue across periods to see if sales are growing or declining
• Gross profit margin: divide gross profit by revenue to see how efficiently you deliver products or services
• Operating margin: divide operating profit by revenue to see how much you keep from core operations before interest and taxes
• Net profit margin: divide net profit by revenue to gauge your overall profitability after all expenses and taxes
• Expense patterns: review operating expenses to spot areas where costs are rising faster than revenue
• Period comparisons: compare this month or quarter to the same period last year to identify seasonal patterns

If your net income is shrinking while revenue stays flat, your expenses may be climbing. If your gross profit margin is dropping, your direct costs may be too high relative to your prices.

Profit and loss statement example

A worked example makes the flow easier to follow. Here's a simplified P&L statement for a small consulting business covering one quarter:

• Revenue: $50,000
• Cost of goods sold: $10,000
• Gross profit: $40,000
• Operating expenses: $25,000
• Net income: $15,000

This example shows the business earned $50,000 in consulting fees, spent $10,000 on direct project costs, and had $25,000 in overhead like rent and salaries. The result is $15,000 in profit for the quarter.

A gross profit margin of 80% ($40,000 divided by $50,000) suggests the business delivers its services efficiently. The net profit margin of 30% ($15,000 divided by $50,000) points to healthy overall profitability.

P&L statement vs cash flow statement

A P&L statement and a cash flow statement serve different purposes in your financial reporting. They're 2 of the 3 core financial statements, alongside the balance sheet, and each answers a different question about your business.

A profit and loss statement has these characteristics:

• Shows whether you're profitable over a period
• Includes revenue and expenses when they're earned or incurred
• Records credit sales even if customers haven't paid yet
• Tells you whether your business model is working

A cash flow statement has these characteristics:

• Shows actual money moving in and out of your business
• Tracks when cash is received and spent
• Reveals whether you have enough cash to pay bills
• Tells you whether you can cover expenses right now

You can be profitable on paper but still run into cash flow problems if customers pay slowly. Both statements matter for understanding your financial health.

Manage your profit and loss statement with Xero

Understanding your profit and loss statement helps you see your finances clearly and make confident decisions. Whether you're tracking profitability, preparing for tax season, or applying for a loan, a clear P&L shows exactly where your business stands.

Xero's cloud accounting software builds profit and loss statements from your daily transactions, so you can check your profitability anytime, from anywhere. Try Xero today and get one month free to start managing your finances with less manual work.

FAQs on profit and loss statements

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

What does P&L mean?

P&L stands for profit and loss. It's shorthand for a profit and loss statement.

How do you calculate profit and loss?

Subtract your total expenses from your total revenue. A positive result is a profit, and a negative result is a loss.

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

There isn't one: they're two names for the same report. "Income statement" is the more formal term used in official filings, while "profit and loss statement" is common in everyday business use.

What's the difference between a profit and loss statement and a balance sheet?

A P&L statement covers performance over a period, showing your revenue, expenses, and resulting profit or loss. A balance sheet is a snapshot at a single point in time, showing what you own and owe.

What's the difference between a P&L statement and a cash flow statement?

A P&L statement reports profitability based on when revenue is earned and expenses are incurred. A cash flow statement tracks the actual money moving in and out of your bank account.

How often should a small business prepare a P&L statement?

Many small businesses review a P&L monthly for management decisions, quarterly to review performance, and annually for taxes. Accounting software like Xero generates P&L statements continuously.

Related terms

• Profit
• Net profit margin
• Calculate net profit margin
• Profitability

Learn more about profit and loss statements

• Measure profitability
• What is profit margin
• Profit and loss example
• Income statement template