Profit and loss statement (P&L)
Learn what a profit and loss statement is, what it includes, and how to read and prepare one.
Published Thursday 6 August 2026
Table of contents
Key takeaways
- A profit and loss statement (also called a P&L or income statement) summarises your business revenue, costs, and expenses over a specific period to show whether you made a profit or a loss.
- The main components are revenue, cost of goods sold (COGS), gross profit, operating expenses, and net profit or net loss.
- Regularly reviewing your P&L helps you spot trends, control costs, and make confident decisions about pricing, spending, and growth.
- In Hong Kong, companies must prepare financial statements that include profit and loss information under the Companies Ordinance, and business profits are reported to the Inland Revenue Department.
What is a profit and loss statement?
A profit and loss statement is a financial report that shows how much money your business earned and how much it spent over a set period. The difference between the two tells you whether your business made a profit or a loss.
You might also hear it called a P&L, an income statement, or a statement of profit and loss. It can cover any timeframe you choose, whether that's a month, a quarter, or a full financial year.
Sales performance can shift from one period to the next, and your P&L is where those changes show up first. Reviewing it regularly helps you catch a dip in margins or a jump in costs early, so you can respond before it affects your bottom line.
What does a profit and loss statement include?
A profit and loss statement breaks down your business finances into a handful of key line items. Here are the main components you'll find on most P&L statements.
- Revenue (also called turnover): the total income your business earned from selling goods or services before any costs are deducted
- Cost of goods sold (COGS): the direct costs of producing or purchasing whatever you sell, such as raw materials, manufacturing costs, or wholesale stock
- Gross profit: your revenue minus your COGS, which feeds into your gross profit margin and shows how much you keep after covering direct production costs
- Operating expenses: the day-to-day costs of running your business that aren't directly tied to production, such as rent, salaries, utilities, marketing, and insurance
- Net profit (or net loss): the amount left after all expenses, including operating costs, interest, and tax, have been subtracted from revenue
The difference between COGS and operating expenses matters. COGS covers costs directly linked to what you sell, while operating expenses cover the broader costs of keeping the business going.
How to read a profit and loss statement
Reading a profit and loss statement is straightforward once you know what each section tells you. Start at the top with revenue and work your way down to net profit.
Revenue at the top shows the total your business earned before any deductions. Subtracting COGS gives you gross profit, which reveals how efficiently you're producing or sourcing your products.
You can calculate your gross profit margin with a simple formula: gross profit divided by revenue, multiplied by 100. For example, if your gross profit is HK$60,000 and revenue is HK$150,000, your gross profit margin is 40%. A falling gross profit margin may signal rising material costs or pricing pressure.
Below gross profit, operating expenses show what it costs to run the business day to day. Subtracting these from gross profit gives you operating profit. Finally, after accounting for interest and tax, you arrive at net profit.
Your net profit margin is net profit divided by revenue, then multiplied by 100. This percentage tells you how much of every dollar earned actually stays in the business. Tracking your margins with a net profit margin calculator over time helps you spot trends and take action early.
How to prepare a profit and loss statement
Preparing a profit and loss statement follows a logical sequence. These steps walk you through the process from start to finish.
- Choose your reporting period. Decide whether you're preparing a monthly, quarterly, or annual statement.
- Add up your revenue. Total all income from sales and any other sources during the period.
- Calculate your cost of goods sold. Add together the direct costs of producing or purchasing the goods or services you sold.
- Work out your gross profit. Subtract COGS from revenue.
- List your operating expenses. Gather all business running costs for the period, including rent, wages, utilities, marketing, and insurance.
- Calculate your net profit or net loss. Subtract operating expenses, interest, and tax from gross profit. A positive figure means you made a profit; a negative figure means a loss.
Cloud small business accounting software like Xero can generate a P&L automatically from the transactions you've already recorded, saving you the work of building one from scratch.
Profit and loss statement example
A worked example makes the numbers easier to follow. Here's a simplified profit and loss statement for a fictional Hong Kong coffee shop called Brew & Co. for the quarter ending 31 March 2026.
- Revenue (total sales): HK$150,000
- Cost of goods sold (coffee beans, milk, food supplies): HK$54,000
- Gross profit (revenue minus COGS): HK$96,000
- Operating expenses (rent, staff wages, utilities, marketing, insurance): HK$72,000
- Operating profit (gross profit minus operating expenses): HK$24,000
- Interest and tax: HK$5,400
- Net profit: HK$18,600
In this example, Brew & Co. has a gross profit margin of 64% and a net profit margin of 12.4%. Both figures give the owner a clear picture of how the business is performing and where costs might need attention.
Single-step vs multi-step profit and loss statements
There are two common formats for a profit and loss statement, and the right choice depends on how much detail you need.
A single-step P&L is the simpler option. It adds up all revenue, subtracts all expenses in one calculation, and arrives at net profit. This format works well for sole proprietors and very small businesses with straightforward finances.
A multi-step P&L separates costs into categories. It first subtracts COGS from revenue to show gross profit, then subtracts operating expenses to show operating profit, and finally accounts for interest and tax to reach net profit. This format gives you more insight into where your money is going and suits growing companies that want a fuller breakdown.
If you use accounting software, it typically produces a multi-step P&L by default, which gives you the most useful breakdown for making decisions.
How a profit and loss statement differs from a balance sheet
A profit and loss statement and a balance sheet answer different questions about your business. Understanding both gives you a fuller financial picture.
Your P&L shows performance over a period. It tells you how much you earned and spent, and whether the result was a profit or a loss. A balance sheet, by contrast, shows your financial position at a single point in time: what the business owns (assets), what it owes (liabilities), and what's left for the owner (equity).
These financial statements are connected. The net profit or loss from your P&L feeds into the equity section of your balance sheet. A third report, the cash flow statement, tracks how cash actually moved in and out of the business during the same period.
Your P&L may record revenue on an accrual basis, meaning sales are recognised when they're made, not when payment arrives. That matters because getting paid can take time, so a healthy profit on paper doesn't always mean cash in the bank. Reading your P&L alongside your cash flow statement gives you the clearest view of both profit and liquidity.
Common profit and loss statement mistakes to avoid
A profit and loss statement is only as useful as the figures behind it. These are the mistakes that most often throw off the numbers.
- Mixing up COGS and operating expenses, which distorts your gross profit and hides where money is really going
- Recording revenue in the wrong period rather than when it's earned, which overstates or understates performance
- Leaving out non-cash costs such as depreciation, which makes profit look higher than it is
- Skipping the reconciliation of your P&L against bank records, which lets small errors build up over time
Profit and loss reporting in Hong Kong
If you run a business in Hong Kong, it helps to understand how profit and loss reporting fits into your obligations. The requirements depend on how your business is structured.
Companies incorporated in Hong Kong must keep proper accounting records and prepare annual financial statements. Under the Companies Ordinance (Cap. 622), a company's directors must prepare financial statements that report its profit or loss, and those statements must be audited unless the company is dormant. Smaller private companies that qualify for the reporting exemption can prepare simplified financial statements under less complicated accounting standards.
Your profit figure also feeds into your tax. Businesses report their profits to the Inland Revenue Department (IRD) through a profits tax return, and Hong Kong has no VAT or GST to account for. Under the two-tiered profits tax regime, corporations pay 8.25% on the first HK$2 million of assessable profits and 16.5% on the rest, while unincorporated businesses such as sole proprietorships and partnerships pay 7.5% and 15%.
Sole proprietors and partnerships don't file audited company accounts, but they still need accurate income and expense records to complete their profits tax returns. Keeping digital records of income and expenses makes that far easier, whatever your business structure.
Track your profit and loss with Xero
Keeping on top of your profit and loss doesn't have to mean hours of manual work. With Xero's cloud accounting software, your P&L report can update automatically as you record transactions, so you can check how the business is doing at any time.
Xero pulls your income and expenses into a clear P&L report, helps you track margins, and makes it simple to share figures with your accountant or bookkeeper. Try it for yourself and get one month free.
FAQs on profit and loss statements
Here are answers to some common questions about profit and loss statements.
Why is a profit and loss statement important?
A profit and loss statement shows whether your business is making or losing money over a given period. It helps you identify trends, control costs, and make informed decisions about pricing, hiring, and investment.
What is the difference between a P&L and a balance sheet?
A P&L measures financial performance over a period, while a balance sheet shows what the business owns and owes at a specific point in time. Together they give a complete picture of your financial position.
How often should you prepare a profit and loss statement?
Most small businesses benefit from reviewing a P&L monthly or quarterly. More frequent reviews help you spot issues early and make timely adjustments.
Do Hong Kong companies have to prepare a profit and loss statement?
Companies incorporated in Hong Kong must prepare financial statements that include their profit or loss under the Companies Ordinance. Sole proprietors and partnerships don't file company accounts but still need the same records for their profits tax returns.
What is the difference between a single-step and multi-step profit and loss statement?
A single-step P&L subtracts all expenses from all revenue in one calculation. A multi-step P&L breaks costs into categories and shows interim figures like gross profit and operating profit, giving you more detail.
What is accrual accounting and how does it affect a P&L?
Accrual accounting records revenue when it's earned and expenses when they're incurred, regardless of when cash changes hands. This means your P&L might show sales you haven't been paid for yet and bills you haven't paid.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.