Profit and loss statement
See what a profit and loss statement is, what it includes and how to read yours.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- A profit and loss statement shows your revenue, costs and expenses over a set period, so you can see whether you made a profit or a loss.
- It is also called a P&L or income statement, and it usually covers a month, a quarter or a year.
- Reading from the top line (revenue) down to the bottom line (net profit) tells you how much of your sales you keep once all costs are taken out.
- A regular profit and loss statement helps you spot trends, manage costs and make confident decisions about your business.
What is a profit and loss statement?
A profit and loss statement is a financial report that summarises the revenue, costs and expenses your business records over a set period. It shows whether you made a profit or a loss during that time.
You might also see it called a P&L or an income statement. It can cover any period you choose, but it usually covers a month, a quarter or a year.
What a profit and loss statement includes
A profit and loss statement moves from what you earned to what you kept. It brings together a few standard figures so you can see how each layer of cost affects your result.
The main parts of a profit and loss statement are:
- revenue: the total money your business earns from sales before any costs are taken out
- cost of goods sold (COGS): the direct costs of producing the goods or services you sold
- gross profit: revenue minus cost of goods sold, which shows how much you keep before wider running costs
- operating expenses: the ongoing costs of running the business, such as rent, wages, marketing and utilities
- net profit: gross profit minus all other operating expenses and tax, which is the amount you actually keep
Keeping gross profit and net profit separate matters, because each answers a different question about how your business is performing.
How to read a profit and loss statement
A profit and loss statement is designed to be read from top to bottom. You start with the top line, your revenue, and work down through your costs to the bottom line.
Revenue sits at the top, then cost of goods sold is subtracted to give gross profit. Operating expenses and tax come off next, and the figure that remains at the bottom is your net profit or net loss. That bottom line tells you whether the business made money over the period.
If you're building your first one, a ready-made profit and loss statement template lays out these lines for you so you know where each figure goes.
Profit and loss statement example
A simple worded example shows how the figures connect. Imagine a small café reporting on one quarter.
- Revenue from food and coffee sales is $60,000.
- Cost of goods sold, covering ingredients and packaging, is $24,000, leaving a gross profit of $36,000.
- Operating expenses such as rent, wages and power come to $26,000.
- After tax of $2,000, the net profit is $8,000.
In this example, the café keeps $8,000 of its $60,000 in sales once every cost is accounted for.
Cash vs accrual: what a profit and loss statement counts
Most profit and loss statements are prepared on an accrual basis. That means the report counts income and costs when they happen, not when the money actually moves.
On an accrual basis, your P&L counts sales you have invoiced but not yet been paid for, and bills you have incurred but not yet paid. A cash basis works differently: it only counts money once it lands in or leaves your bank account, so the same period can show a very different result.
How a profit and loss statement differs from other financial statements
The profit and loss statement is one of the three main financial statements, alongside the balance sheet and the cash flow statement. Each one gives you a different view of your business.
A balance sheet is a snapshot of what you own and owe at a single point in time, while a profit and loss statement covers performance across a period. A cash flow statement tracks the cash moving in and out of your business, which can differ from your profit when you use accrual accounting. Read together, these statements show both how you performed and where you stand.
Why your profit and loss statement matters
Your profit and loss statement is one of the clearest ways to understand how your business is really doing. Reviewing it regularly turns raw numbers into decisions you can act on.
A regular P&L helps you spot trends over time, manage costs before they get out of hand, and work out your profit margins. With that information in front of you, you can make confident decisions about pricing, spending and where to grow next.
See your profit and loss in real time with Xero
You don't have to wait until the end of the month to know where you stand. Xero builds your profit and loss statement from your everyday transactions, so you can check performance whenever you need to and try it out when you get one month free.
FAQs on profit and loss statements
Here are answers to some frequently asked questions about profit and loss statements to help you use yours with confidence.
Is a profit and loss statement the same as an income statement?
Yes, a profit and loss statement and an income statement are the same report. Some businesses simply prefer one name over the other.
What is the difference between a profit and loss statement and a balance sheet?
A profit and loss statement covers your performance over a period, such as a quarter. A balance sheet shows what you own and owe at a single point in time.
How often should you prepare a profit and loss statement?
Many small businesses prepare one monthly so they can track trends closely. A quarterly or yearly statement can work if your finances change more slowly.
What is the difference between gross profit and net profit?
Gross profit is revenue minus cost of goods sold. Net profit is what remains after you take all other operating expenses and tax off that gross profit.
Related terms
Learn more about profit and loss statements
Handy resources
Advisor directory
You can search for experts in our advisor directory
Profit & Loss template
Download Xero’s profit and loss statement template to show how much money you business is making
Financial reporting
Keep track of your performance with accounting reports
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.