What Is a Profit and Loss Statement?

A profit and loss statement is an important financial document that summarizes revenue and costs over a specific period. It’s also called a “P&L statement,” “income statement” or “income and expense statement.”

Creating and analyzing a P&L statement can provide valuable insights into the financial health of your business. It can help you monitor profitability, make decisions about future investments and prepare to apply for funding.

What is a profit and loss statement?

A profit and loss statement is an important financial document that tracks a business’s sales and expenses and shows whether or not it was profitable — and by how much — during a specific period. Typically, profit and loss statements are completed monthly.

The profit and loss statement shows important information that, when analyzed alongside balance sheets and cash flow statements, makes business decisions easier. For instance, a P&L statement can help you:

• Identify seasonal, monthly, quarterly and annual trends in sales.
• Calculate which products or services are most profitable.
• Track where you’re spending money on expenses.
• Prepare for potential income shortfalls.
• Identify areas for management improvement.
• Evaluate the success of your business plan.

What are P&L statements used for?

The main purpose of a profit and loss statement is to tell you if your company is making or losing money over a specific period of time, typically monthly, quarterly or annually. You can use profit and loss statements to manage small business finances and make strategic decisions about your business.

In addition to keeping tabs on financial health, a profit and loss statement is needed to secure funding, like business loans and lines of credit. Many lenders, including the Small Business Administration (SBA), require applicants to submit a P&L statement during the loan application process.

Types of profit and loss statements

There are two accounting methods used for P&L statements: the cash accounting method and the accrual method.

Cash accounting method

With the cash accounting method, you record sales and expenses when you actually receive or spend money. For example, if you give customers 90 days to pay, you don’t record sales until you receive payment from them. This easy accounting method may be adequate for simple businesses, like food trucks or housekeeping services, that don’t usually have timing differences between when transactions occur and when they are paid for.

Accrual method

Most companies use the accrual method. Under this method you record sales and expenses when the business transaction happens — even if money hasn’t been paid or received yet. Balance sheet accounts like accounts payable and accounts receivable are used to keep track of what you owe and are owed.

The accrual method is necessary for businesses that offer customer financing as well as businesses that keep inventory on hand. It requires use of double-entry accounting software or a bookkeeping service.

Components of a P&L statement

Understanding a P&L statement can give you key insights about your business once you understand the metrics it provides. Though these metrics can vary from company to company, they generally include the following:

• Revenue or sales: Amount received from selling your goods or services.
• Costs of goods sold (COGS): Cost of producing these goods or providing these services, including materials, labor and any other costs included in what you’re selling.
• Gross profit: Revenue minus COGS. This important metric tells you if you’re selling products for more than they cost to make. In a profitable business, it should always be a positive number.
• Operating expenses: Management salaries, utilities, rent, insurance, supplies, web hosting, interest, depreciation and other costs that are needed to run the business but not directly part of the product you’re selling. These expenses are sometimes called “fixed costs” or “overhead.”
• Pretax profit: What’s left after subtracting operating expenses from gross profit. If your pretax profit is negative, it means you must either increase sales or reduce expenses.
• Net profit: Pretax profit minus income taxes. It’s also called the “bottom line.”

Understanding net profit

Net profits are a key metric in your P&L statement: A positive number reflects profit, and a negative number indicates a loss. Losses occur when slow or declining sales are not sufficient to cover operating expenses, or expenses escalate faster than sales.

A net loss is a sign of trouble but doesn’t tell the full story. To find out why your business wasn’t profitable, you’ll have to examine individual expense categories. Comparing performance trends over time, like quarter to quarter, may help you pinpoint the areas causing problems.

How to make a profit and loss statement

The first step in creating a P&L statement is to gather your data on sales and expenses. Important information you’ll need to pull together includes:

For revenue:

1. Cash register or POS terminal printout
2. Merchant account summary of credit card sales
3. Reports from other payment processors like Stripe, Venmo, Paypal or Zelle
4. Copies of invoices you sent out to customers

For expenses:

1. Bills from suppliers
2. Statements for credit cards you’re using for business expenses
3. Payroll processing reports, if you have employees

Next it’s time to put your data into a P&L format. You can either purchase accounting software or create your own statement using a spreadsheet program. Using accounting software is generally the most efficient approach because after you input your data, the program automatically generates the P&L statement and other reports.

But if you’re running a very simple business or creating a forecast of future profits based on assumptions, also called a pro forma profit and loss statement, a spreadsheet is the easiest tool for the job. You can build your own P&L spreadsheet template or download a free template.

How to create your own Excel or Google Sheets template

If you’d like to create your own profit and loss statement on a spreadsheet, these steps will guide you through the process.

1. Open a spreadsheet like Excel or Google Sheets and name it “Profit & Loss Statement.” Save the document and, starting in cell A1, enter your company name and any other pertinent information, like the date you created the report.
2. After entering the information above, skip a row and type “Revenue.” Move one cell to the right and enter the time period the report will cover, such as “January 2025.”
3. Return to column A and, in the next rows, enter the names of all sources of revenue you’d like to include. Use a separate row for each type of product or service sold.
4. Once you’ve entered all your revenue sources, move to the next row and type “Total Revenue.”
5. Move one cell to the right and enter the sum formula [e.g., =SUM(B11:B14)], including all revenue entries in your equation’s data range.
6. Return to column A, skip one row, and type “Cost of Goods Sold” or “COGS.”
7. In the next rows, enter the names of each type of COGS used to produce your products — usually you’ll have separate rows for “labor” and “materials,” for example.
8. Move to the next row and type “Total COGS.”
9. Move one cell to the right and enter the sum formula, ensuring that all COGS are included in the data range
10. Return to column A, skip one row, and type “Gross Profit.”
11. Move one cell to the right and enter the subtraction formula for your chosen spreadsheet application (e.g., =B15-B21), where B15 is the total revenue and B21 is the total COGS.
12. Return to column A, skip a row and type “Operating Expenses.” On the following rows enter the name of each expense category such as Rent, Utilities, Travel, and others.
13. Move to the next row and type “Total Expenses.” Then, move one cell to the right and enter the sum equation for all rows in “Expenses.”
14. Return to Column A, skip a row and then type “Pretax Profit (Loss).” Then, move one cell to the right and enter the subtraction formula to subtract Operating Expenses from your Gross Profits.
15. Optional: you can also add a separate line for Income Taxes and then a final line for Net Profit with the formula Pretax Profit minus Income Taxes.

You now have a basic P&L statement. You can use it to track profits and losses over time by moving one column to the right (column C, D, E and so on) to input new data each month, quarter or year. You can also incorporate formulas to calculate month-over-month, quarter-over-quarter or year-over-year changes, which can help you spot important trends in your financial situation.

Other financial tracking forms

In addition to the P&L statement, other reports that will help you fully understand your business’s health include:

• Cash flow statement: If you use the accrual accounting method, you’ll need a cash flow statement to tell you what’s causing cash to flow in and out of your bank account.
• Balance sheet: This report is essential to keep track of your assets (what you own) and liabilities (debts you owe).
• Accounts receivable aging: If you extend credit to customers, the aging report alerts you when they’ve exceeded their repayment period so you can pursue collections.
• Comparison to budget: Creating a business budget and comparing it to your actual results is a great way to analyze where you’re succeeding and where you can improve.