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A profit and loss statement, or “P\&L”, is an effective tool for managing your business. It is a financial statement that provides a snapshot of how much your company is making (revenue) compared to how much is being spent (costs and expenses). Simply put, your P\&L shows your business’s revenue minus costs and expenses, typically over a specified period. The outcome is your net profit or bottom line. Business owners and management use this information to analyze the financial health of the company. For example, is it profitable? Are costs reasonable? Are enough sales being generated? ## Profit and loss compared to other financial statements The P\&L, also referred to as the income statement or statement of revenue and expense, is typically used alongside other key financial reports like the [balance sheet](https://business.bankofamerica.com/en/resources/how-to-read-and-create-balance-sheet) and [cash flow statement](https://business.bankofamerica.com/en/resources/cash-flow-management-basics-for-small-businesses) to determine the health of a business. - The **balance sheet**, or statement of assets, shows the financial position of a business by detailing assets, liabilities and equity held at a specific point in time. In other words, it provides an overview of what the business owns and how much it owes. - The **cash flow statement** shows how much cash a company is generating or spending over a specific period. This is shown by viewing the business’s operating, investing and financing activities, which provides a view of how the company generates and manages cash. ## Types of profit and loss statements Two [common accounting methods](https://business.bankofamerica.com/en/resources/cash-vs-accrual-accounting) are the cash basis and the accrual basis. These accounting methods result in different types of P\&L statements. - The **cash method statement** is the simplest. When money comes into the business, it is recorded as revenue. When money is used to pay for something like bills or payroll, it is recorded as an expense. - The **accrual method statement** records income as it is earned instead of when cash comes in the door. If you invoice a client using the accrual method, you will account for that income when you perform the service or deliver the product, not when the customer pays. Similarly, expenses are recorded when incurred. ## How to create a profit and loss statement If you use an accounting software, creating a P\&L is as simple as a few clicks of the mouse. That said, understanding what goes into creating one is essential. Here are the steps: 1. **List revenue (sales):** Choose a timeframe for the statement and then list all income from all sources for that period. 2. **List variable costs or Cost of Goods Sold (COGS)**: COGS applies to product-based businesses. It is the actual cost of producing and selling that product. (Cost of services, or COS, is the same thing but for a service business.) Here you would list all costs associated with obtaining and selling your products or service. 3. **Subtract costs from revenue**: This is your gross profit. 4. **List fixed costs or operating expenses**: Things like rent, utilities and payroll. 5. **Subtract operating expenses from gross profit**: This is your operating profit. 6. **Add in additional income, not from regular operations**: Add in income from other sources, such as dividends or interest paid to you. This is known as EBITDA – Earnings before interest, taxes, depreciation and amortization. 7. **List any interest, taxes, depreciation and amortization.** 8. **Subtract interest, taxes, depreciation and amortization from EBITDA**: This is your net profit (or bottom line). Once complete, your P\&L can provide valuable insights. For example, which products, services and revenue streams are paying off and which are lagging? Did that marketing plan for the new store work? Look at the sales numbers for the new store and see. It also gives you a bird’s-eye view of where your business truly is financially, as opposed to where you think it is. While you may have an intuition – and even some facts – that your labor costs, for example, are too high, your P\&L can tell you for sure. [Back to Homepage](https://business.bankofamerica.com/en/resources) ## Explore more  ## [How to read a balance sheet](https://business.bankofamerica.com/en/resources/how-to-read-and-create-balance-sheet) A balance sheet can help you understand how financially healthy your company is or whether you're prepared for new opportunities. Disponible en español 4-minute read  ## [Cash flow management basics for small businesses](https://business.bankofamerica.com/en/resources/cash-flow-management-basics-for-small-businesses) Maintaining a healthy cash flow can help ensure that you have cash available for your needs today and in the long term. But how do you do it? Disponible en español 7-minute read ## **Important Disclosures and Information** Bank of America engages with Steve Strauss to provide materials for informational purposes only, and is not responsible for, and does not guarantee or endorse any of the third-party products or services mentioned. All third-party logos and company names mentioned herein are the property of their respective owners and are used under license from Steve Strauss. Bank of America, Merrill, their affiliates and advisors do not provide legal, tax or accounting advice. Consult your own legal and/or tax advisors before making any financial decisions. Any informational materials provided are for your discussion or review purposes only. The content on the Center for Business Empowerment (including, without limitations, third party and any Bank of America content) is provided “as is” and carries no express or implied warranties, or promise or guaranty of success. 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Bank of America, Merrill, their affiliates and advisors do not provide legal, tax or accounting advice. Consult your own legal and/or tax advisors before making any financial decisions. Any informational materials provided are for your discussion or review purposes only. The content on the Center for Business Empowerment (including, without limitations, third party and any Bank of America content) is provided “as is” and carries no express or implied warranties, or promise or guaranty of success. Bank of America does not warrant or guarantee the accuracy, reliability, completeness, usefulness, non-infringement of intellectual property rights, or quality of any content, regardless of who originates that content, and disclaims the same to the extent allowable by law. All third party trademarks, service marks, trade names and logos referenced in this material are the property of their respective owners. Bank of America does not deliver and is not responsible for the products, services or performance of any third party. Not all materials on the Center for Business Empowerment will be available in Spanish. Certain links may direct you away from Bank of America to unaffiliated sites. Bank of America has not been involved in the preparation of the content supplied at unaffiliated sites and does not guarantee or assume any responsibility for their content. When you visit these sites, you are agreeing to all of their terms of use, including their privacy and security policies. Credit cards, credit lines and loans are subject to credit approval and creditworthiness. Some restrictions may apply. Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF\&S" or “Merrill") makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp."). MLPF\&S is a registered broker-dealer, registered investment adviser, [Member SIPC](https://www.sipc.org/), and a wholly owned subsidiary of BofA Corp. Banking products are provided by Bank of America, N.A., and affiliated banks, Members FDIC, and wholly owned subsidiaries of BofA Corp. “Bank of America” and “BofA Securities” are the marketing names used by the Global Banking and Global Markets division of Bank of America Corporation. Lending, derivatives, other commercial banking activities, and trading in certain financial instruments are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Trading in securities and financial instruments, and strategic advisory, and other investment banking activities, are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, BofA Securities, Inc., which is a registered broker-dealer and [Member of SIPC](https://www.sipc.org/), and, in other jurisdictions, by locally registered entities. BofA Securities, Inc. is a registered futures commission merchant with the CFTC and a member of the NFA. ##