Profit and loss statement
Learn what a profit and loss statement is, what it includes, and how to use one to track your business performance.
Published Thursday 23 July 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.
- UK limited companies must file a profit and loss account with Companies House as part of their annual accounts.
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 significantly from one period to the next, and your P&L is where those changes show up first. According to Xero Small Business Insights, UK small business sales grew by 2.9% year on year in the first quarter of 2026, down from 5.2% growth in the previous quarter. Reviewing your P&L regularly helps you catch these shifts early and respond before they affect 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, showing 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 60,000 pounds and revenue is 150,000 pounds, 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 calculated by dividing net profit by revenue, then multiplying by 100. This percentage tells you how much of every pound earned actually stays in the business. Tracking both profit margins 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 UK coffee shop called Brew & Co. for the quarter ending 31 March 2026.
- Revenue (total sales): 150,000 pounds
- Cost of goods sold (coffee beans, milk, food supplies): 54,000 pounds
- Gross profit (revenue minus COGS): 96,000 pounds
- Operating expenses (rent, staff wages, utilities, marketing, insurance): 72,000 pounds
- Operating profit (gross profit minus operating expenses): 24,000 pounds
- Interest and tax: 5,400 pounds
- Net profit: 18,600 pounds
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 2 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 traders 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 is the standard for most UK limited companies.
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).
The 2 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 show that revenue was recorded on an accrual basis, meaning sales are recognised when they're made, not when payment arrives. This matters because getting paid can take time. Research from Xero Small Business Insights shows that UK small businesses waited an average of 29 days to be paid in the first quarter of 2026, with invoices paid an average of 8.2 days late. That's why reviewing your P&L alongside your cash flow statement gives you the clearest view of cash flow and profit.
Profit and loss accounts in the UK
If you run a UK business, it helps to understand the rules around profit and loss reporting. The requirements depend on how your business is structured.
UK limited companies must prepare annual accounts that include a profit and loss account and file them with Companies House. Most small and medium-sized companies prepare these under Financial Reporting Standard 102 (FRS 102), which is the main accounting standard for UK businesses that aren't publicly listed. Listed companies follow International Financial Reporting Standards (IFRS) instead.
Your profit and loss figures also feed into your Corporation Tax return, which you submit to HM Revenue and Customs (HMRC). The net profit on your P&L is the starting point for calculating how much tax the company owes.
Sole traders and partnerships don't file a P&L with Companies House, but they still need accurate income and expense records for their Self Assessment tax returns. With Making Tax Digital (MTD) for Income Tax rolling out for self-employed people and landlords above certain income thresholds, keeping digital records of income and expenses is becoming a requirement for more and more businesses.
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. You can 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 UK companies have to file a profit and loss statement?
UK limited companies must include a profit and loss account in the annual accounts they file with Companies House. Sole traders and partnerships don't file one with Companies House but need the same records for their 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.