How to read a profit & loss statement

Published Thursday 2 July 2026

Table of contents

• What is a profit and loss statement?
• Income statement vs profit and loss statement
• What does a profit and loss statement look like?
• Why the profit and loss statement matters
• How to read a profit and loss statement
• Profit and loss vs balance sheet and cash flow
• Track your profit and loss with Xero
• FAQs on profit and loss statements

Key takeaways

• A profit and loss (P&L) statement, also called an income statement, shows your revenue, expenses, and profits over a set period so you can see whether your business made money.
• From top to bottom, the P&L reads: revenue, cost of goods sold, gross profit, operating expenses, operating income, taxes, and net income.
• To spot trends, compare P&L reports from different time periods, or segment reports by product, project, or location.
• Banks, lenders, and investors often require a current P&L before approving loans or funding, so keeping yours up to date is essential.

What is a profit and loss statement?

A profit and loss statement (P&L) is a financial report that summarizes your revenue, costs, and expenses over a specific period, such as a month, quarter, or year, to show whether your business earned a profit or incurred a loss. Also called an income statement, it's one of the most important reports for any business.

You can generate P&L reports for a single period or compare multiple periods side by side to track how your business is performing over time. The report gives you a clear picture of where your money is coming from and where it's going.

Income statement vs profit and loss statement

A profit and loss statement and an income statement are the same document. "Income statement" is the term used more often in formal accounting and by publicly traded companies, while "profit and loss statement" (or "P&L") is more common among small businesses. Regardless of the name, the report contains the same information: your revenue, expenses, and net profit or loss for a given period.

What does a profit and loss statement look like?

Profit and loss reports include all your business's income and expenses, as well as depreciation and amortization. Many businesses, especially corporations, include business income taxes on their P&L reports so they can see after-tax profits.

Here are the main categories you'll find on a typical P&L:

• Income: Revenue earned by your business from sales or services
• Cost of goods sold (COGS): Inventory purchased for resale, or labor and supplies costs for manufacturing products
• Gross profit: The difference between income and COGS
• Operating expenses: Costs like rent, utilities, wages, taxes, office supplies, and interest on loans
• Depreciation: The depreciation claimed on capital assets, such as machinery, office equipment, vehicles, and real estate
• Other income and expenses: Income and expenses not related to your core business activities
• Profit or loss: The difference between your income and your COGS, expenses, and depreciation

Why the profit and loss statement matters

The profit and loss statement calculates your business profits. But it also breaks down income and expenses, so you can analyze changes between time periods.

For example, if profits are high one quarter and low the next, you can compare the P&L reports from each quarter to see if you had a drop in sales, an increase in expenses, or another change that led to the difference. You can then use that insight to guide decisions.

Banks, lenders, and investors also rely on the P&L statement when evaluating loan applications or deciding whether to invest in your business. Keeping your P&L current helps you stay prepared for funding opportunities.

The P&L report shows your taxable income for the tax year. Small business tax obligations are detailed in IRS Publication 334.

P&Ls also give you the numbers you need to calculate your profit margins:

• Gross profit margin = (revenue – COGS) ÷ revenue
• Operating profit margin = (revenue – COGS – operating expenses) ÷ revenue
• Net profit margin = net income ÷ revenue (where net income is revenue minus COGS, operating expenses, taxes, and all other expenses)

These formulas show you the percentage of your revenue that turns into profit. For example, if revenue is $1 million and net income is $100,000, your net profit margin is 10%.

How to read a profit and loss statement

All profit and loss statements follow a similar layout, which means that once you can read one, you can read them all. Once you know how to read a P&L, you can pull reports from multiple time periods to compare the numbers and identify trends. Here's how to read a P&L, starting from the top of the report.

1. Start with income

P&Ls always start with income. The report may show a single number for sales revenue or break it down into categories based on business activities. For example, restaurants might separate liquor and food sales.

2. Subtract cost of goods sold to get gross profit

Cost of goods sold (COGS) appears after income and includes inventory purchases, or labor and supply costs incurred to manufacture items for sale. You can calculate COGS based on actual expenses, or you can take inventory into account.

Talk with your accountant to identify the best method for your business and to learn about any requirements based on the size of your business.

Businesses that sell items, like retailers, restaurants, and manufacturers, will have COGS on their P&Ls, while service businesses typically don't. Subtract COGS from income to get your gross profit. If you don't have COGS, gross profit is the same as income.

3. Deduct operating expenses

The next section of the report lists your operating expenses. Although the categories vary by business, they generally include things like:

• advertising
• vehicle expenses
• contract labor
• insurance
• interest
• legal and professional fees
• rent
• repairs and maintenance
• travel and meals
• utilities
• wages

Subtract operating expenses from gross profit to get your operating income. If it's the end of the year, remember to consider depreciation.

The IRS provides guidance on deductible business expenses.

4. Factor in depreciation

Most businesses account for depreciation once a year. So if you pull a profit and loss report in the middle of the year, it won't show depreciation, but a full-year report will include it.

For example, say you buy a capital asset with a 5-year depreciation period for $100,000. At the end of each year, you or your accountant will make a depreciation adjustment to your accounting records. If you use straight-line depreciation, you'll report $20,000 in depreciation once a year for 5 years. The numbers may differ if you use a different depreciation method.

5. Look at your operating income

Your operating income is the difference between your gross profit and your operating expenses, including depreciation. It shows how much you earned from your core business activities after covering expenses, but before paying taxes.

6. Enter other income and expenses

If you have income or expenses that aren't from your core business activities (known as "non-operating" revenue and expenses), they appear below operating income.

• Non-operating revenue: Income earned from activities outside core operations, such as gains from investments, interest income, or rent from tenants leasing space in a building your business owns
• Non-operating expenses: Costs like legal settlements. Some businesses include interest expenses in this category, while others include interest with operating expenses

7. Account for taxes

Taxes appear near the bottom of the report. This section only includes corporate or personal income tax paid on the business's profits; it doesn't include payroll taxes or property taxes, which are both operating expenses.

• C-corporations should include the tax due on their annual corporate tax return.
• S-corps, partnerships, and sole proprietors all pay business taxes on their personal income tax returns.

Ask your tax preparer which portion of your total tax due should be attributed to your business.

The difference between operating income and taxes is your net income, also called net profit after taxes, or "the bottom line."

Profit and loss vs balance sheet and cash flow

The P&L is one of the 3 most important financial statements for your business. While all 3 reports use the same underlying data, each one answers a different question.

• Profit and loss statement: Shows your business's financial performance over a period, answering the question: "Did I make money?"
• Balance sheet: Shows what your business owns, owes, and is worth at a single point in time, answering: "What's my financial position right now?" Here's a guide to balance sheet basics.
• Cash flow report: Shows how cash entered and exited your business over a period, answering: "Where did my cash go?" You can also generate cash flow projections to estimate future cash movement.

In short, the P&L measures profitability, the balance sheet measures financial health, and the cash flow report measures liquidity. Together, they give you a complete picture of your business finances.

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FAQs on profit and loss statements

Here are answers to common questions about profit and loss statements.

How do you make a simple profit and loss statement?

List your total revenue at the top, then list all your expenses below it. Subtract total expenses from total revenue. The result is your profit (if positive) or loss (if negative). A spreadsheet or accounting software can automate this for you.

How often should you run a P&L?

At minimum, run a P&L once a month to stay on top of your business performance. You'll also need one at the end of each tax year to complete your business tax return. Many business owners run them weekly or even daily during busy periods.

Should you use cash or accrual on a P&L?

Use whichever method matches your accounting method. Most small businesses use the cash method, which records income and expenses when cash changes hands. Larger businesses typically use the accrual method, which records transactions when they're earned or incurred, regardless of when payment happens.

What are the 3 most important parts of a P&L?

Revenue, cost of goods sold (COGS), and operating expenses. Revenue is what you earn, while COGS and operating expenses cover everything you spend. To improve your bottom line, focus on increasing revenue or reducing costs, and your P&L shows you exactly where to start.

How do you get a profit and loss statement from accounting software?

Go to the reports section in your accounting software, select "Profit and Loss" or "Income Statement," and define the time period you want to review. Most platforms let you compare multiple periods side by side. Then run the report and review the results.