Profit and loss statement
Learn what a profit and loss statement is, what it includes, and how to read and prepare one for your business.
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- A profit and loss statement summarises your revenue, costs, and expenses over a specific period to show whether your business made a profit or a loss.
- Gross profit is revenue minus cost of goods sold, while net profit is what remains after deducting all operating expenses and tax.
- Preparing a P&L regularly helps you track performance, manage cash flow, and make informed business decisions.
- South African companies may need to file annual financial statements with CIPC and submit taxable income to SARS, with the P&L as the starting point.
What is a profit and loss statement?
A profit and loss statement is a financial report that summarises your business's revenue, costs, and expenses over a set period, showing whether you made a profit or a loss. It's also called an income statement or P&L.
The P&L gives you a snapshot of your business's financial performance. You can prepare one monthly, quarterly, or annually to track trends and guide decisions.
What does a profit and loss statement include?
A profit and loss statement breaks down your financial activity into a few core components.
- Revenue (turnover): the total income your business earns from selling goods or services
- Cost of goods sold (COGS): the direct costs of producing or purchasing what you sell
- Gross profit: revenue minus cost of goods sold
- Operating expenses: ongoing costs such as rent, salaries, utilities, and marketing
- Net profit: what remains after subtracting all expenses and tax from gross profit
How to read a profit and loss statement
Reading a profit and loss statement starts at the top with revenue and works down through costs and expenses to net profit at the bottom.
Begin with revenue, which shows how much money came in from sales. Subtract cost of goods sold to find gross profit. If revenue is R200,000 and COGS is R80,000, your gross profit is R120,000.
Next, subtract operating expenses such as rent, salaries, and marketing. If those total R70,000, your operating profit is R50,000. After interest and tax (say R12,000), your net profit is R38,000.
Profit margins help you compare performance over time or against competitors. The gross profit margin is gross profit divided by revenue, expressed as a percentage. The net profit margin is net profit divided by revenue. The average after-tax profit margin across South African businesses was 1.3% in 2024, according to Statistics South Africa's Annual Financial Statistics, as analysed by the Bureau of Market Research. Understanding your profitability ratios helps you benchmark your own business.
How to prepare a profit and loss statement
Preparing a profit and loss statement involves gathering your financial data and organising it into the standard format. Following a clear process helps ensure accuracy.
- Choose the reporting period (monthly, quarterly, or annually) and gather all income and expense records for that time.
- Calculate total revenue by adding up all sales and other income.
- Determine cost of goods sold by totalling the direct costs of the products or services you sold.
- Subtract COGS from revenue to find gross profit.
- List and total your operating expenses, including rent, salaries, utilities, and marketing.
- Subtract operating expenses, interest, and tax from gross profit to arrive at net profit.
Accounting software can generate a P&L automatically from your recorded transactions. If you're setting up your finances, a guide to small business accounting can help you get started.
Profit and loss statement example
Here's a worked example for a Cape Town coffee shop over one month.
- Revenue: R150,000
- Cost of goods sold (coffee beans, milk, pastries): R54,000
- Gross profit: R96,000
- Operating expenses (rent, wages, utilities, marketing): R72,000
- Operating profit: R24,000
- Interest and tax: R5,400
- Net profit: R18,600
The gross profit margin is 64% (R96,000 ÷ R150,000). The net profit margin is 12.4% (R18,600 ÷ R150,000). This tells the owner that while the business retains a healthy share of each sale after direct costs, operating expenses consume most of the gross profit.
Single-step vs multi-step profit and loss statements
Profit and loss statements come in two main formats, and the right choice depends on your business's complexity.
A single-step P&L groups all revenue together and all expenses together, then subtracts total expenses from total revenue to show net profit. It's straightforward and works well for smaller businesses with simple operations.
A multi-step P&L separates operating activities from non-operating items such as interest and tax. It calculates gross profit first, then operating profit, and finally net profit. Most South African companies use the multi-step format because it provides more detail for decision-making and meets reporting standards.
How a profit and loss statement differs from a balance sheet
The profit and loss statement and the balance sheet serve different purposes, and understanding both gives you a fuller picture of your finances.
A P&L covers a specific period and shows whether you made a profit or loss during that time. A balance sheet is a snapshot of a single date, listing your assets, liabilities, and equity. Together, they form the core of your financial statements.
If your business uses accrual accounting, revenue and expenses appear on the P&L when they're earned or incurred, not when cash changes hands. This can create timing differences between reported profit and actual cash flow. Learning the difference between cash and accrual accounting helps you interpret both reports accurately.
Profit and loss reporting in South Africa
South African businesses have specific requirements for preparing and filing financial statements, depending on their legal structure and size.
Companies report under the Companies Act 71 of 2008. Annual financial statements are prepared under IFRS or IFRS for SMEs, depending on the company's public interest score. Certain companies must file their annual financial statements with the Companies and Intellectual Property Commission (CIPC), with audit or independent review required based on that score.
Company income tax is paid to the South African Revenue Service (SARS), currently at a flat 27%. Reduced Small Business Corporation rates are available under section 12E for qualifying companies. The net profit on your P&L is the starting point for taxable income, which you submit on the ITR14 return via SARS eFiling.
Sole traders and partnerships don't file with CIPC but still need accurate income and expense records for their personal income tax returns. Most pay provisional tax twice a year to spread their tax liability.
Track your profit and loss with Xero
Staying on top of your profit and loss helps you make confident decisions about pricing, spending, and growth. Xero generates P&L reports automatically from your recorded transactions, so you can see your performance in real time without manual calculations.
With bank feeds, invoice tracking, and expense management in one place, you spend less time on bookkeeping and more time running your business. 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.
Why is a profit and loss statement important?
A P&L shows whether your business is profitable and where your money goes. It helps you spot trends, control costs, and plan for growth.
What's the difference between a profit and loss statement and a balance sheet?
A P&L summarises income and expenses over a period, while a balance sheet shows assets, liabilities, and equity at a single point in time. Both are essential for understanding your financial position.
How often should I prepare a profit and loss statement?
Monthly P&L reports give you timely insights for managing your business. Quarterly or annual statements are useful for tax preparation and long-term planning.
Do South African companies have to file a profit and loss statement?
Companies above certain public interest score thresholds must file annual financial statements, including a P&L, with CIPC. All companies submit taxable income to SARS, calculated from the P&L.
What's the difference between single-step and multi-step profit and loss statements?
A single-step P&L subtracts total expenses from total revenue in one calculation. A multi-step P&L separates operating and non-operating items to show gross profit, operating profit, and net profit separately.
What is accrual accounting and how does it affect a P&L?
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash moves. This gives a more accurate picture of profitability but can differ from your cash balance.
Related terms
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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.