Profit and loss statement (P&L)
See what a profit and loss statement is, what it includes, and how to prepare one for your business.
Published Monday 17 August 2026
Table of contents
Key takeaways
- A profit and loss statement (also called a P&L or income statement) shows your revenue, expenses, and profit or loss over a period, calculated as revenue minus expenses equals profit or loss.
- Reading your P&L regularly helps you spot changes in sales, control costs, and make confident decisions about where to invest or cut back.
- In the Philippines, corporations file audited financial statements with the SEC through eFAST, and your P&L figures feed into the income tax return you submit to the BIR.
- Understanding the difference between gross profit (revenue minus cost of goods sold) and net profit (what's left after all expenses and taxes) helps you measure your business's true performance.
What is a profit and loss statement?
A profit and loss statement is a financial report that summarises your revenue, expenses, and profit or loss over a specific period. The formula is simple: revenue minus expenses equals profit (or loss). You'll also hear it called a P&L, income statement, or statement of earnings.
While the balance sheet shows what you own and owe at a single point in time, the P&L shows how your business performed over weeks, months, or a year. It's one of the core financial statements investors, lenders, and business owners use to assess profitability.
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 revenue or a rise in costs early, so you can respond before it affects your bottom line.
What does a profit and loss statement include?
A standard P&L includes the following line items, typically shown in this order:
- Revenue (also called sales or turnover): the total income from selling goods or services
- Cost of goods sold (COGS): direct costs tied to producing what you sell, such as materials and labour
- Gross profit: revenue minus COGS, showing how much you make before operating expenses
- Operating expenses: ongoing costs like rent, utilities, salaries, and marketing
- Operating profit: gross profit minus operating expenses
- Interest and taxes: borrowing costs and income tax obligations
- Net profit: the final figure after all expenses, also called the bottom line
Each line builds on the one above, so you can trace exactly where money comes in and where it goes out.
How to read a profit and loss statement
Start at the top with revenue and work down. Subtract COGS to get gross profit, then subtract operating expenses to find operating profit, and subtract interest and taxes to reach net profit.
Compare line items to the previous period or budget. A drop in gross profit might mean your costs have risen or your prices need adjusting. A shrinking net profit while revenue grows could signal that expenses are outpacing sales.
Using profit margins to gauge performance
Profit margins turn raw numbers into percentages you can compare across periods or against industry benchmarks. Two key profitability ratios are:
- Gross profit margin: gross profit divided by revenue, multiplied by 100. If your gross profit is PHP 600,000 and revenue is PHP 1,500,000, your gross profit margin is 40%.
- Net profit margin: net profit divided by revenue, multiplied by 100. This shows the share of each peso in sales that becomes profit after all costs. Use the net profit margin calculator to check yours.
Tracking these margins over time helps you measure profitability and spot trends before they become problems.
How to prepare a profit and loss statement
You can prepare a P&L using accounting software, a spreadsheet, or a profit and loss statement template. Follow these steps:
- Choose your reporting period, such as monthly, quarterly, or yearly.
- Gather your revenue figures from sales records or invoices.
- Calculate your cost of goods sold, including materials, direct labour, and production costs.
- Subtract COGS from revenue to find gross profit.
- List your operating expenses, such as rent, salaries, marketing, and utilities.
- Subtract operating expenses from gross profit to get operating profit.
- Deduct interest and taxes to arrive at net profit.
Decide whether to use cash or accrual accounting. Accrual records revenue when earned and expenses when incurred, giving a fuller picture of performance. Cash records them when money changes hands. Most businesses with inventory or credit sales use accrual.
Profit and loss statement example
Here's a simplified annual P&L for a fictional Philippine coffee shop called Kape & Co.:
- Revenue (total sales): PHP 1,500,000
- Cost of goods sold: PHP 540,000
- Gross profit: PHP 960,000
- Operating expenses: PHP 720,000
- Operating profit: PHP 240,000
- Interest and taxes: PHP 54,000
- Net profit: PHP 186,000
Kape & Co.'s gross profit margin is 64% (PHP 960,000 divided by PHP 1,500,000). Its net profit margin is 12.4% (PHP 186,000 divided by PHP 1,500,000). These figures let the owner compare performance to industry averages and track progress year over year.
Single-step vs multi-step profit and loss statements
A single-step P&L groups all revenue together, lists all expenses together, and calculates net profit in one subtraction. It's straightforward but offers less detail.
A multi-step P&L separates operating revenue from non-operating income, and operating expenses from interest and taxes. It shows gross profit and operating profit as intermediate figures, making it easier to analyse where profits come from.
Most small businesses benefit from the multi-step format because it highlights cost structure and operating efficiency.
Common profit and loss mistakes to avoid
Even with accurate records, a few common errors can distort your P&L or lead to poor decisions:
- Mixing personal and business expenses: keeping them separate ensures your P&L reflects true business costs.
- Ignoring cash flow: a profitable P&L doesn't mean cash in the bank, so review it alongside managing cash flow.
- Skipping regular reviews: monthly or quarterly reviews help you catch issues early, rather than waiting until year-end.
- Misclassifying expenses: putting costs in the wrong category can inflate gross profit or hide operating problems.
Good bookkeeping habits prevent most of these issues.
How a profit and loss statement differs from a balance sheet
The P&L shows performance over a period: how much you earned, spent, and kept as profit. The balance sheet shows your financial position at a single point: what you own (assets), what you owe (liabilities), and the difference (equity).
Net profit from your P&L flows into retained earnings on the balance sheet, linking the two statements. Together with the cash flow statement, they give a complete view of financial health.
Getting paid can take time, so sales recorded on your P&L may not have reached your bank account yet. That's why reviewing both statements matters, especially if you extend credit to customers.
Profit and loss reporting in the Philippines
In the Philippines, corporations register with the Securities and Exchange Commission (SEC) and file audited financial statements each year through the SEC's eFAST system, as explained in this guide to audited financial statements. These statements follow a Philippine Financial Reporting Standards (PFRS) framework, with smaller companies typically using PFRS for SMEs or PFRS for Small Entities under Revised Securities Regulation Code (SRC) Rule 68, the frameworks set by the Philippine standard-setting body.
Your profit and loss figures also feed into the income tax return you file with the Bureau of Internal Revenue (BIR). Net income on your P&L is the starting point for corporate income tax, which is 25%, or 20% for smaller domestic corporations with net taxable income up to PHP 5 million and total assets up to PHP 100 million, excluding land.
Sole proprietors and partnerships also report their income and expenses to the BIR through their annual income tax return. If gross annual sales or receipts exceed PHP 3 million, the return must include audited financial statements prepared by an independent CPA, so keeping accurate records through the year matters for every business structure.
Track your profit and loss with Xero
Xero's financial reporting tools let you generate P&L reports in a few clicks, compare periods side by side, and share data with your accountant or bookkeeper in real time. Automated bank feeds and invoicing keep your records current, so your profit and loss statement reflects where your business stands right now. Get one month free and see how Xero can simplify your financial reporting.
FAQs on profit and loss statements
Here are answers to common questions about profit and loss statements.
What is the difference between a profit and loss statement and an income statement?
They're the same report. "Profit and loss statement" and "income statement" are interchangeable terms for a financial report showing revenue, expenses, and profit or loss over a period.
How often should I prepare a profit and loss statement?
Most small businesses prepare a P&L monthly or quarterly to track performance and catch issues early. At a minimum, you'll need an annual statement for tax filing and year-end review.
Is a profit and loss statement required by the BIR in the Philippines?
Yes. Your income tax return filed with the BIR relies on your P&L figures. Corporations submit audited financial statements through the SEC, and sole proprietors or partnerships with gross sales above PHP 3 million must attach audited statements to their BIR return.
Can a profit and loss statement show a loss?
Yes. If expenses exceed revenue, the bottom line is negative, and you've made a loss for that period. Reviewing what drove the loss helps you adjust pricing, cut costs, or find new revenue streams.
What's the difference between gross profit and net profit?
Gross profit is revenue minus cost of goods sold, showing what you make before operating costs. Net profit is what's left after all expenses, interest, and taxes, reflecting your true bottom line.
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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.