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A profit and loss (P&L) statement is the same as an income statement. It’s a financial document that includes a company’s revenues and expenses. Business owners use the P&L to understand how much money a company makes, which they can also quickly and easily do with accounting software. Knowing how to read a profit and loss statement is key to making informed business decisions. It shows you where you might be able to cut costs. Let’s look at exactly what a P&L is, why it’s important, and how business owners should use it: What is the format of a profit & loss (P&L) statement? How to put together a profit and loss statement How to read a P&L statement Example of a profit and loss statement Spend more time growing your business Profit and loss statement FAQ QuickBooks Online tutorial for understanding a profit & loss statement. What is the format of a profit & loss (P&L) statement? A profit and loss statement is a snapshot of a company's sales and expenses over some time, such as one year. It shows company revenues, expenses, and net income over that period. The bottom line on a P&L will be net income, also known as profit or loss. The profit and loss formula is: Revenue - Expenses = Profit or loss There are many ways to format a P&L statement, but all versions include the same basic information. Sales are at the top of the P&L statement, while expenses appear below. The profit or loss is the difference between the two. Here are the main components of a profit and loss statement: Example of a profit and loss (P&L) statement. Revenue Revenue is the money your business makes from selling goods or services. It’s the very first line on the profit and loss statement. Note there are two types of revenue: Gross revenue, or total revenue or sales, is the total amount you make before accounting for discounts, returns, or expenses. Net revenue, also known as net sales, is the money you make after deducting discounts and returns. Note that net revenue is gross revenue minus discounts and returns. Expenses The expenses of a business include all the costs to generate revenue. Cost of goods sold (COGS) is the cost of materials and labor a company uses to make a product or service. It’s also known as the cost of sales. The costs can include raw materials or direct wages for employees. But also certain overhead costs, such as utilities. COGS are expenses that show up on the top part of the P&L before gross profit. Gross profit is the money you make from sales after subtracting your cost of goods sold, using the formula: Gross profit = Net revenue - Cost of goods sold Other expenses can be operating or non-operating. Operating expenses are the costs of running your business. While COGS are for making a product, operating expenses are the costs to support that process. Operating expenses include: Rent Marketing costs Salaries for admin staff Depreciation Licensing fees Non-operating expenses are costs not part of your core operations. These include taxes, fines, legal fees, and interest. Non-operating expenses include anything unlikely to happen again. For example, losses due to shutting down a business operation. Income Income is how much money you make in your business. There are two key types of income—operating and net income. Operating income is a business's income from its core operations. It excludes non-operating expenses, such as taxes or interest expenses. This type of income measures how well a company generates money from its main business. The formula for operating income is: Operating income = Gross profit - Operating expenses Net income is your bottom line—the last item on your P&L. It's the money left after subtracting all expenses. Net income = revenue - COGS - Operating expenses - Non-operating expenses Net income comes after both operating and non-operating expenses on the P&L. It’s a measure of the money left over for shareholders or owners. How to put together a profit and loss statement The P&L will include three key components—revenue, expenses, and income. There are three key steps to making a profit and loss statement. 1. Start with revenue Determine what period you want to create a profit and loss statement for. This can be any period, but it’s generally best practice to put together a P&L monthly to help identify trends. You’ll want to calculate your gross revenue ‌for that period and list it on the top line of your P&L. 2. Calculate your costs After accounting for all your revenues, group your expenses into one of three categories: Cost of goods sold (COGS) Operating expenses Non-operating expenses COGS are all the costs of making a product. For a service business that doesn’t make a physical product, COGS can include labor for employees performing the service. For example, a hair stylist’s COGS would include the time spent styling hair. You'll group all the other costs of running your business as operating expenses. Non-operating expenses should be everything that's left. This will be the money you spend on things like taxes and interest. For example, a hairstylist would have operating expenses like cosmetic supplies, insurance, and marketing. Non-operating expenses may include interest on business debt or writing off unsellable inventory. 3. Figure out your net income This is the last step. It's subtracting all the expenses from your revenue. The net income will either be a profit or a loss—or, in very rare cases, zero. How to read a P&L statement Once you’ve put together your profit and loss statement, it’s useful to analyze it. It’ll show whether you’re profitable or not. But it also allows you to identify areas to save or reduce spending. Determine profitability Profitability measures how much a business earns compared to its expenses. There are different ways to measure profitability. Two common measures of profitability are gross profit margin and net profit margin. Key profitability ratios, including gross profit margin and net profit margin. Say a window maker’s revenue was $500,000 last year. They spent $300,000 on COGS to make the windows. Net income for the year was $40,000. The company's gross profit margin is 40% or ($500,000 - $300,000) / $500,000. Its net profit margin is 8% or $40,000 / $500,000. Many small businesses aim for a net profit margin of 10%, although this will depend on your industry. Assess financial ratios Beyond profitability, the P&L can also help you calculate other ratios. But you’ll need the help of the balance sheet. Other key ratios you’ll want to look at are efficiency ratios. These assess how well a company uses its resources. They use one item from the P&L and one from the balance sheet. The accounts receivable turnover ratio shows how well a business is managing accounts receivable. Accounts receivable is the amount of money that your customers owe you. You’ve already sent them the products but haven’t collected payment yet. Here’s the formula: Accounts receivable turnover = Sales / Average accounts receivable A low or declining accounts receivable turnover shows a declining ability to collect customer payments. The inventory turnover ratio tells how well a company is managing inventory, and the formula is: Inventory turnover ratio = Cost of goods sold / Average inventory You can also use an inventory turnover calculator to help you see how your business is doing. Comparing P&L statements P&L statements are most useful when comparing them to previous periods because they allow you to track progress over time. They’re also useful when it comes to setting goals for your business. note iconYou can also compare your P&L to companies in your industry. This will help you determine where you stand relative to other businesses. Example of a profit and loss statement The single-step method of putting together a P&L statement is simple, straightforward, and involves only one calculation. This method subtracts all expenses from revenues to get net income—it doesn't separate revenues and expenses into different categories. The disadvantage of the single-step method is that it doesn't provide as much detail. This makes it difficult for businesses to analyze their profitability. However, the single-step method is quick and easy to calculate. It works for businesses that don’t have many expenses. The multistep method involves more calculations and the classification of expenses. But it makes assessing your company's profitability easier. It groups the cost to make products or services as costs of goods sold (COGS). The remaining expenses are either operating or non-operating. Here’s a simple profit and loss statement using the multistep method, which is what many businesses use: Spend more time growing your business As a small business owner, you need to be aware of your company’s financial health. One of the best ways to do this is to analyze your profit and loss statement and assess key financial KPIs. Regularly reviewing your P&L will give you a better idea of how your business is doing. Accounting software like QuickBooks Online makes creating your P&L and other financial statements easy, as well as assessing your spending.

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What Is a Profit and Loss (P&L) statement… And Why Is it So Important to My Business?

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Many business owners begin on a small scale in response to these unexpected questions: “Have you thought about selling those?” or “Can you do that for me?” They realize they might be able to make extra cash on the side—or even turn their hobby into a career. When a business venture starts this way, the owner usually doesn’t know if it will gain traction or expand. As a result, many business operations start with business finances that are simply an extension of personal finances, using personal accounts. As the business grows, the owner may not make any adjustments, thinking, “It’s all my money anyway, so why does it matter?” 4 reasons to separate business and personal finances How to separate business and personal finances: 6 simple steps Separate business and personal expenses for accuracy and protection Operating a business through personal financial accounts presents significant problems on many fronts. The foundation of financial health for every business owner is separating the finances of the business from the owner’s personal finances. This is true for businesses of all sizes, even the smallest ones with only one owner and no employees. 4 reasons to separate business and personal finances To see how your business is performing. The only way to know whether your business is profitable—and how much cash it's generating—is to have an accurate picture of business revenues and expenses. These enable financial reporting to get the full picture of your business' financial standing. If you commingle business and personal income and expenses, you’ll never know your true profitability. To file taxes accurately. Calculating business taxes, regardless of the type of filing, requires accurate financial records of business revenues and expenses. If you’re audited, you need to show that transactions used to calculate business taxes were for business purposes. Bookkeepers, including QuickBooks Live Expert Assisted experts,* can help you get your books clean for tax time. To protect your personal assets. Some business legal entity types offer the owner a way to separate the legal and financial liabilities of the business in a way that offers protection for their personal assets. But if the owner commingles finances between their personal accounts and the business entity, it could jeopardize these protections. Check with your accountant for help determining what kind of business entity you should pursue. To get more access to business financing. If a business has more than one owner or needs to take out a business loan, it's essential to have accurate business accounting and financial documentation. Most lenders require business financial statements for larger loans. External business partners need to see standardized financial reports to understand the financial health of the business. A person sitting at a desk with a laptop computer. Run your business with confidence Get help and guidance when you need it from real QuickBooks experts.* Start here How to separate business and personal finances: 6 simple steps It’s straightforward and inexpensive to separate business finances. Separation is the key to establishing good financial hygiene. Here's how to separate business and personal expenses and finances. File paperwork to establish a business. Creating a business that exists separate from yourself can protect your personal money and assets. Choose a business structure—LLCs, partnerships, and S-corps are the most common for small businesses—and file the paperwork with your state. You also need to get an Employer Identification Number (EIN) from the IRS for filing taxes. Once your business exists as an entity separate from yourself, be sure to follow the below best practices to avoid "piercing the corporate veil." Separate personal and business bank accounts. The business should have its own checking account and debit card for making business purchases. You need to have your EIN to set up a business bank account. It's often convenient to keep business accounts at the same bank as your personal checking. This makes transfers and distributions easy, and can sometimes mean extra benefits or rewards. This also allows the bank to see your personal finances in borrowing situations that require a personal guarantee from the owner. Create separate profiles to receive payments. Social payment platforms such as Venmo, Paypal, and Zelle are popular ways to pay friends and family, but business payments should run through a separate account. Often, digital service platforms have business-specific profiles that keep you compliant with their terms of service too. Set up business-specific profiles to accept digital payments or for merchant services, if you accept credit card payments directly. Accounting software like QuickBooks Online can link all your digital services platforms together to track revenue in one place. Run all business financial transactions through the business accounts. Now that your business banking account and avenues to receive payment are established, keep those financial transactions separate from your personal income streams and spending. All business expenses should be paid or reimbursed out of business accounts. All revenue from clients should flow directly into business accounts. Work with your accountant to determine the best way to pay yourself through your business. With growth, establish other accounts under your business. As the business grows, it might need other services, such as credit cards, loans, payroll, insurance, and money market accounts. Apply for or run these services using your business name and EIN to avoid piercing the corporate veil. Keep track of all business revenues and expenses. Good tracking and bookkeeping practices are essential for many reasons, including accurate business financial statements and tax calculations. Experts can give you support and answer questions through QuickBooks Live Expert Assisted, so you can feel confident in your books.* There are also low-cost courses you can take to build your bookkeeping skills. See how this voiceover artist uses QuickBooks Live Expert Assisted. Explore tools made for businesses like yours. Get 50% off QuickBooks for 3 months. Start here Separating business and personal finances for accuracy and protection If your business already has separate financial accounts, you’re on the right track. Make sure you use the accounts as intended and run business transactions through business accounts. If you’re still using personal accounts for some or all business-related transactions, talk with a banker who can help you establish the right set of business accounts for your situation. Separating your business expenses and personal expenses is an important step in protecting your personal finances.

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ericbuchholz

What Is a Profit and Loss (P&L) statement… And Why Is it So Important to My Business?

What Does a Bookkeeper Really Do?

6 Easy Steps to Separate Business and Personal Finances

What Are Accounts Payable… And How Do They Impact My Cash Flow?

What is Gross Profit… And How Do I Calculate It?

10 Common Types of Accounting Errors in Bookkeeping

Financial Statements: 101… The Beginner-Friendly Guide on How to Read Them

Small Business & Form 1099: What You Need to Know for 2025

5 Ways Small Business Owners Can Maximize Their Holiday Revenue in 2024

Debit vs. Credit in Accounting: What the Heck Does it All Mean?

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