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| Boilerpipe Text | At some point, you’ve probably heard the phrase, “It takes money to make money.” But if you’re not careful, it’s easy for expenses to spiral out of control — and you could end up making little to no profit. That’s why every business should track revenue and expenses with a profit and loss (P&L) statement. A P&L statement helps you measure your company’s financial health and see how your business is really performing.
Here’s a look at what a P&L statement is, what it includes, and how to use one to gain valuable insights into your business.
Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
What is a P&L statement?
A P&L statement is a financial report that summarizes a company’s revenue, expenses and profit or loss over a fiscal year or quarter. When you read a P&L statement, you’ll see whether the company is generating sales, managing expenses and earning a profit.
The two main categories outlined in a P&L statement are income and expenses. Income includes things like product sales, interest earned, commissions and rental income. Expenses include the cost of goods sold (COGS), marketing and advertising fees and taxes.
“A P&L statement is important for businesses because it gives them a picture of how their business is doing during a given period of time,” explained Jackie Rockwell, co-founder of Brass Jacks, an online bookkeeping academy. “Business owners are often most interested in the bottom line — what is left over after the expenses have been subtracted from the income.”
Publicly traded companies are required to produce three financial reports every quarter: a P&L statement, a balance sheet and a
cash flow statement
.
Types of profit and loss statements
P&L statements typically follow one of two formats: single-step or multistep. The type you’ll use depends on your business size, complexity and reporting needs.
Single-step P&L statement:
This format simplifies the process by grouping all income and gains together and all expenses and losses together. Then, it subtracts total expenses from total revenue to show net profit or loss. Single-step P&L statements are common for small businesses that don’t need to break out operating income separately.
Multistep P&L statement:
This format provides a more detailed view by separating operating income from nonoperating income and expenses. It includes subtotals like gross profit and operating income, giving a clearer picture of core business performance. Larger or GAAP-compliant businesses typically use multistep statements.
P&L statement preparation methods
There are two common methods of preparing P&L statements:
cash accounting and accrual accounting
.
Cash:
This is the most straightforward method, as it measures the actual cash going in and out of a business. It records income when it’s received and expenses when they’re paid. This method is popular among solopreneurs and small businesses because it’s simple and easy to understand.
Accrual:
In contrast, the accrual method records revenue when it’s earned and expenses when they’re incurred — regardless of when cash is exchanged. For example, if you deliver a product to a customer but haven’t been paid yet, the accrual method still recognizes the revenue on your P&L. Companies that follow
Generally Accepted Accounting Principles (GAAP)
are required to use accrual accounting.
How to create and read a profit and loss statement
A P&L statement is a straightforward and insightful tool that shows how your business is doing financially over a set period. Whether you’re creating one from scratch or reviewing a report generated by your accounting software, here’s how to build and understand a P&L statement.
1. Choose a reporting period.
Start by selecting the time frame you want to review — usually monthly, quarterly or annually. This period will define which income and expenses you include in the report.
2. Calculate your revenue.
List all sources of income during the reporting period. This includes revenue from your core business activities (like selling products or services) and nonoperating income (like interest earned or the sale of
business assets
).
This is the top line of your P&L.
3. Calculate your cost of goods sold (COGS).
Next, determine the direct costs involved in producing your goods or services. This might include materials, production labor or
product packaging
. If you run a service business, COGS may include things like subcontractor fees or the cost of billable labor.
Use this formula to calculate COGS:
Beginning Inventory + Purchases – Ending Inventory = COGS
Although COGS is an expense, it’s listed separately for tax purposes — the IRS allows you to deduct COGS from your income before calculating taxable profit.
4. Subtract COGS from revenue to find your gross profit.
Next, you’ll find your gross profit with this formula:Â
Revenue – COGS = Gross Profit
This number shows how much you made from sales after covering direct production costs. It’s a key indicator of your business’s core profitability.
5. List and total your operating expenses.
Now, list your day-to-day operating expenses. These include
overhead costs
like rent, marketing, utilities, payroll, office supplies, insurance and software.
These costs are necessary to run your business but don’t directly generate revenue.
6. Subtract expenses from gross profit to find your net income
Next, you’ll subtract your operating expenses from gross profit to find your net income.
Gross Profit – Expenses = Net Income
This is your “bottom line” — what’s left after covering all your business costs. Depending on your accounting method and reporting format, your P&L may also include additional deductions like interest, taxes, depreciation and amortization. If your net income is positive, you’ve earned a profit. If it’s negative, your business has taken a loss during the reporting period.
7. Review and analyze the results.
Reading a P&L isn’t just about plugging in numbers — it’s about understanding what they say.Â
Ask yourself the following questions when reviewing your P&L statement:
Are revenues increasing or decreasing?
Are expenses under control?
Are certain cost areas eating into your profit?
Your P&L can help you spot patterns, adjust your budget and make smarter financial decisions moving forward.
What is included in a P&L statement?
While we’ve already walked through how to create a P&L, it’s helpful to see everything that might appear on one — all in one place. Depending on how detailed your report is, a profit and loss statement may include:
Total revenue
Cost of goods sold (COGS)
Gross profit
Operating expenses
Selling, general and administrative (SG&A) expenses
Marketing and advertising costs
Research and development (R&D) expenses
Depreciation and amortization
Interest paid
Taxes (e.g., income taxes)
Earnings before interest, taxes, depreciation and amortization (EBITDA)
Net income (profit or loss)
A P&L focuses only on income and expenses for a specific period. It doesn’t include your business’s assets, liabilities, or equity — those appear on your
balance sheet
.
When compiling your P&L statement, look out for
employee accounting fraud
, such as people padding expenses or creating fictitious expenses.
Example of a P&L
Below is a copy of General Motors’ 2018-2020 P&L statement, which the company refers to as its consolidated income statement.Â
Why do businesses need to track P&L?
If you’re not a publicly traded company with shareholders to report to, you may wonder whether creating a profit and loss statement is necessary. However, Rockwell emphasized that every company should review its P&L regularly to support smarter
business decision-making
.
“While public companies are required to report their financials, private businesses rely on P&Ls for internal decision-making,” Rockwell explained. “Sometimes it is tempting to just watch the bank balance, but that doesn’t tell the full story. A P&L helps business owners understand where the company is spending its money and if a pivot needs to occur in order to stay profitable.”
Here are several crucial reasons all businesses should track their profits and losses:
Tracking P&L reveals profitability.
A P&L statement shows whether your business is profitable by revealing if you’re earning or losing money on the sale of your products or services. Regularly tracking this information can also help you spot opportunities to boost revenue or cut costs — and inspire new ideas to
increase sales
.
Tracking P&L helps you spot trends.
By reviewing your P&L regularly, you can identify patterns in your financial performance, compare them to
industry trends
, and make decisions to improve your business. For example, if gross revenue is down, it may be time to find ways to boost sales. Another scenario could be if revenue is steady but net income is falling, which indicates it’s time to look for ways to
cut business costs
. “One of my favorite ways to look at a P&L is to look at an entire year and divide it up into quarters. This is a really easy way to see trends that occur throughout the year,” Rockwell noted.
Tracking P&L helps you gauge your business’s health
. If you ever
apply for a small business loan
, your lender will likely request financial documents like a P&L statement. This report gives them a snapshot of your business’s financial health and shows whether you’re earning a profit.
How accounting software can help manage your P&L statement
Creating a P&L statement isn’t difficult, and you can certainly do it on your own. However, the process becomes much easier — and more accurate — when you use accounting software. The right platform can help you avoid common
accounting challenges
and costly
accounting mistakes
.
With accounting software, your revenue and expenses are tracked automatically and consistently. That means you can generate a professional P&L statement with just a few clicks at the end of the quarter or year.
Here are a few great options to consider:Â
QuickBooks Online:
QuickBooks Online offers a robust set of accounting tools for businesses of all sizes and stages. Its ability to generate reports like P&L statements is unparalleled. The platform automatically categorizes transactions and lets you monitor your company’s cash flow directly from the dashboard. Read our detailed
QuickBooks Online review
for more information.
FreshBooks:
FreshBooks is a cloud-based accounting platform you can access from any device. It’s an especially good option for freelancers or business owners who are not well-versed in accounting. The software uses double-entry accounting, so you can easily generate financial reports like P&L statements and better understand your business’s financial health. You can also invite your accountant to collaborate in your FreshBooks account. Our comprehensive
FreshBooks review
explains more.Â
Xero:
Xero is an affordable, flexible accounting platform with multiple plan options to fit different business needs. It includes all the essentials for new businesses, along with advanced features like payroll and inventory management. Xero helps you track expenses and monitor your real-time cash position. As explained in our
Xero review
, you can also use the software to generate financial reports and stay organized during tax season.
Oracle NetSuite:
Oracle NetSuite is an excellent choice for businesses that want to automate core accounting functions. You’ll only pay for the features you use, making it a smart option for small organizations planning to scale. The platform can reconcile transactions, manage
accounts payable and receivable
, and generate detailed financial reports. Our updated
Oracle NetSuite review
shares more about this solution’s features and functionality.
The
best accounting software
for your business will fit your budget, integrate with your other applications, include key
accounting software features
, and have an easy, intuitive interface.
P&L statements provide valuable insights into your business
A P&L statement provides an overview of how much your business is earning and whether you’re making or losing money. Businesses of all sizes can benefit from creating and reviewing a P&L statement regularly.
If you’re new to P&L statements, you can start with a template or consider investing in feature-rich accounting software. Platforms like QuickBooks Online and Xero make it easy to track expenses and generate a P&L statement in seconds. That way, you can stay on top of your finances and be better prepared for tax season. |
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# What Is a Profit and Loss Statement?
A profit and loss statement summarizes a business's revenue and expenses. Learn how to use a profit and loss statement to gain information about your business.
Written by:
[Jamie Johnson,](https://www.business.com/author/jamie-johnson/) Senior Analyst
Editor verified:
Shari Weiss,Senior Editor
Last Updated Jan 13, 2026
Business.com earns commissions from some listed providers. [Editorial Guidelines](https://www.business.com/about-us/editorial-process/).
### What is a P\&L statement?
At some point, you’ve probably heard the phrase, “It takes money to make money.” But if you’re not careful, it’s easy for expenses to spiral out of control — and you could end up making little to no profit. That’s why every business should track revenue and expenses with a profit and loss (P\&L) statement. A P\&L statement helps you measure your company’s financial health and see how your business is really performing.
Here’s a look at what a P\&L statement is, what it includes, and how to use one to gain valuable insights into your business.
**Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.**
## What is a P\&L statement?
A P\&L statement is a financial report that summarizes a company’s revenue, expenses and profit or loss over a fiscal year or quarter. When you read a P\&L statement, you’ll see whether the company is generating sales, managing expenses and earning a profit.
The two main categories outlined in a P\&L statement are income and expenses. Income includes things like product sales, interest earned, commissions and rental income. Expenses include the cost of goods sold (COGS), marketing and advertising fees and taxes.
“A P\&L statement is important for businesses because it gives them a picture of how their business is doing during a given period of time,” explained Jackie Rockwell, co-founder of Brass Jacks, an online bookkeeping academy. “Business owners are often most interested in the bottom line — what is left over after the expenses have been subtracted from the income.”
Did You Know?
Publicly traded companies are required to produce three financial reports every quarter: a P\&L statement, a balance sheet and a [cash flow statement](https://www.business.com/articles/what-is-a-cash-flow-statement/).
### Types of profit and loss statements
P\&L statements typically follow one of two formats: single-step or multistep. The type you’ll use depends on your business size, complexity and reporting needs.
- **Single-step P\&L statement:** This format simplifies the process by grouping all income and gains together and all expenses and losses together. Then, it subtracts total expenses from total revenue to show net profit or loss. Single-step P\&L statements are common for small businesses that don’t need to break out operating income separately.
- **Multistep P\&L statement:** This format provides a more detailed view by separating operating income from nonoperating income and expenses. It includes subtotals like gross profit and operating income, giving a clearer picture of core business performance. Larger or GAAP-compliant businesses typically use multistep statements.
### P\&L statement preparation methods
There are two common methods of preparing P\&L statements: [cash accounting and accrual accounting](https://www.business.com/articles/which-is-better-cash-or-accrual-based-business-accounting/).
- **Cash:** This is the most straightforward method, as it measures the actual cash going in and out of a business. It records income when it’s received and expenses when they’re paid. This method is popular among solopreneurs and small businesses because it’s simple and easy to understand.
- **Accrual:** In contrast, the accrual method records revenue when it’s earned and expenses when they’re incurred — regardless of when cash is exchanged. For example, if you deliver a product to a customer but haven’t been paid yet, the accrual method still recognizes the revenue on your P\&L. Companies that follow [Generally Accepted Accounting Principles (GAAP)](https://www.business.com/articles/generally-accepted-accounting-principles/) are required to use accrual accounting.
## How to create and read a profit and loss statement
A P\&L statement is a straightforward and insightful tool that shows how your business is doing financially over a set period. Whether you’re creating one from scratch or reviewing a report generated by your accounting software, here’s how to build and understand a P\&L statement.
### 1\. Choose a reporting period.
Start by selecting the time frame you want to review — usually monthly, quarterly or annually. This period will define which income and expenses you include in the report.
### 2\. Calculate your revenue.
List all sources of income during the reporting period. This includes revenue from your core business activities (like selling products or services) and nonoperating income (like interest earned or the sale of [business assets](https://www.business.com/articles/assets-in-accounting/)).
This is the top line of your P\&L.
### 3\. Calculate your cost of goods sold (COGS).
Next, determine the direct costs involved in producing your goods or services. This might include materials, production labor or [product packaging](https://www.business.com/articles/how-to-package-your-product/). If you run a service business, COGS may include things like subcontractor fees or the cost of billable labor.
Use this formula to calculate COGS:
Beginning Inventory + Purchases – Ending Inventory = COGS
Although COGS is an expense, it’s listed separately for tax purposes — the IRS allows you to deduct COGS from your income before calculating taxable profit.
### 4\. Subtract COGS from revenue to find your gross profit.
Next, you’ll find your gross profit with this formula:
Revenue – COGS = Gross Profit
This number shows how much you made from sales after covering direct production costs. It’s a key indicator of your business’s core profitability.
### 5\. List and total your operating expenses.
Now, list your day-to-day operating expenses. These include [overhead costs](https://www.business.com/articles/overhead-costs/) like rent, marketing, utilities, payroll, office supplies, insurance and software.
These costs are necessary to run your business but don’t directly generate revenue.
### 6\. Subtract expenses from gross profit to find your net income
Next, you’ll subtract your operating expenses from gross profit to find your net income.
Gross Profit – Expenses = Net Income
This is your “bottom line” — what’s left after covering all your business costs. Depending on your accounting method and reporting format, your P\&L may also include additional deductions like interest, taxes, depreciation and amortization. If your net income is positive, you’ve earned a profit. If it’s negative, your business has taken a loss during the reporting period.
### 7\. Review and analyze the results.
Reading a P\&L isn’t just about plugging in numbers — it’s about understanding what they say.
Ask yourself the following questions when reviewing your P\&L statement:
- Are revenues increasing or decreasing?
- Are expenses under control?
- Are certain cost areas eating into your profit?
Your P\&L can help you spot patterns, adjust your budget and make smarter financial decisions moving forward.
## What is included in a P\&L statement?
While we’ve already walked through how to create a P\&L, it’s helpful to see everything that might appear on one — all in one place. Depending on how detailed your report is, a profit and loss statement may include:
- Total revenue
- Cost of goods sold (COGS)
- Gross profit
- Operating expenses
- Selling, general and administrative (SG\&A) expenses
- Marketing and advertising costs
- Research and development (R\&D) expenses
- Depreciation and amortization
- Interest paid
- Taxes (e.g., income taxes)
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Net income (profit or loss)
A P\&L focuses only on income and expenses for a specific period. It doesn’t include your business’s assets, liabilities, or equity — those appear on your [balance sheet](https://www.business.com/articles/boost-balance-sheet/).
Tip
When compiling your P\&L statement, look out for [employee accounting fraud](https://www.business.com/articles/preventing-employee-fraud/), such as people padding expenses or creating fictitious expenses.
## Example of a P\&L
Below is a copy of General Motors’ 2018-2020 P\&L statement, which the company refers to as its consolidated income statement.
## Why do businesses need to track P\&L?
If you’re not a publicly traded company with shareholders to report to, you may wonder whether creating a profit and loss statement is necessary. However, Rockwell emphasized that every company should review its P\&L regularly to support smarter [business decision-making](https://www.business.com/articles/business-decision-making-gut-instinct-or-hard-data/).
“While public companies are required to report their financials, private businesses rely on P\&Ls for internal decision-making,” Rockwell explained. “Sometimes it is tempting to just watch the bank balance, but that doesn’t tell the full story. A P\&L helps business owners understand where the company is spending its money and if a pivot needs to occur in order to stay profitable.”
Here are several crucial reasons all businesses should track their profits and losses:
- **Tracking P\&L reveals profitability.** A P\&L statement shows whether your business is profitable by revealing if you’re earning or losing money on the sale of your products or services. Regularly tracking this information can also help you spot opportunities to boost revenue or cut costs — and inspire new ideas to [increase sales](https://www.business.com/articles/12-ways-to-increase-sales/).
- **Tracking P\&L helps you spot trends.** By reviewing your P\&L regularly, you can identify patterns in your financial performance, compare them to [industry trends](https://www.business.com/articles/14-simple-solutions-tracking-industrys-trends/), and make decisions to improve your business. For example, if gross revenue is down, it may be time to find ways to boost sales. Another scenario could be if revenue is steady but net income is falling, which indicates it’s time to look for ways to [cut business costs](https://www.business.com/articles/5-ways-to-drastically-cut-business-costs/). “One of my favorite ways to look at a P\&L is to look at an entire year and divide it up into quarters. This is a really easy way to see trends that occur throughout the year,” Rockwell noted.
- **Tracking P\&L helps you gauge your business’s health**. If you ever [apply for a small business loan](https://www.business.com/articles/how-to-apply-for-a-small-business-loan/), your lender will likely request financial documents like a P\&L statement. This report gives them a snapshot of your business’s financial health and shows whether you’re earning a profit.
## How accounting software can help manage your P\&L statement
Creating a P\&L statement isn’t difficult, and you can certainly do it on your own. However, the process becomes much easier — and more accurate — when you use accounting software. The right platform can help you avoid common [accounting challenges](https://www.business.com/articles/small-business-accounting-challenges/) and costly [accounting mistakes](https://www.business.com/articles/small-business-accounting-mistakes/).
With accounting software, your revenue and expenses are tracked automatically and consistently. That means you can generate a professional P\&L statement with just a few clicks at the end of the quarter or year.
Here are a few great options to consider:
- **QuickBooks Online:** QuickBooks Online offers a robust set of accounting tools for businesses of all sizes and stages. Its ability to generate reports like P\&L statements is unparalleled. The platform automatically categorizes transactions and lets you monitor your company’s cash flow directly from the dashboard. Read our detailed [QuickBooks Online review](https://www.business.com/reviews/quickbooks-online/) for more information.
- **FreshBooks:** FreshBooks is a cloud-based accounting platform you can access from any device. It’s an especially good option for freelancers or business owners who are not well-versed in accounting. The software uses double-entry accounting, so you can easily generate financial reports like P\&L statements and better understand your business’s financial health. You can also invite your accountant to collaborate in your FreshBooks account. Our comprehensive [FreshBooks review](https://www.business.com/reviews/freshbooks-accounting-software-and-invoice-generators/) explains more.
- **Xero:** Xero is an affordable, flexible accounting platform with multiple plan options to fit different business needs. It includes all the essentials for new businesses, along with advanced features like payroll and inventory management. Xero helps you track expenses and monitor your real-time cash position. As explained in our [Xero review](https://www.business.com/reviews/xero-accounting-software/), you can also use the software to generate financial reports and stay organized during tax season.
- **Oracle NetSuite:** Oracle NetSuite is an excellent choice for businesses that want to automate core accounting functions. You’ll only pay for the features you use, making it a smart option for small organizations planning to scale. The platform can reconcile transactions, manage [accounts payable and receivable](https://www.business.com/articles/accounts-payable-vs-receivable/), and generate detailed financial reports. Our updated [Oracle NetSuite review](https://www.business.com/reviews/oracle-netsuite/) shares more about this solution’s features and functionality.
FYI
The [best accounting software](https://www.business.com/categories/accounting-software/) for your business will fit your budget, integrate with your other applications, include key [accounting software features](https://www.business.com/articles/features-of-accounting-software/), and have an easy, intuitive interface.
## P\&L statements provide valuable insights into your business
A P\&L statement provides an overview of how much your business is earning and whether you’re making or losing money. Businesses of all sizes can benefit from creating and reviewing a P\&L statement regularly.
If you’re new to P\&L statements, you can start with a template or consider investing in feature-rich accounting software. Platforms like QuickBooks Online and Xero make it easy to track expenses and generate a P\&L statement in seconds. That way, you can stay on top of your finances and be better prepared for tax season.
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Written by: [Jamie Johnson,](https://www.business.com/author/jamie-johnson/) Senior Analyst
Jamie Johnson has spent more than five years providing invaluable financial guidance to business owners, leading them through the financial intricacies of entrepreneurship. From offering investment lessons to recommending funding options, business loans and insurance, Johnson distills complex financial matters into easily understandable and actionable advice, empowering entrepreneurs to make informed decisions for their companies. As a business owner herself, she continually tests and refines her business strategies and services. At business.com, Johnson covers accounting practices, budgeting, loan forgiveness and more. Johnson's expertise is also evident in her contributions to various finance publications, including Rocket Mortgage, InvestorPlace, Insurify and Credit Karma. Moreover, she has showcased her command of other B2B topics, ranging from sales and payroll to marketing and social media, with insights featured in esteemed outlets such as the U.S. Chamber of Commerce, CNN, USA Today, U.S. News & World Report and Business Insider.
- [Email](mailto:jamie.johnson@business.com)
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| Readable Markdown | At some point, you’ve probably heard the phrase, “It takes money to make money.” But if you’re not careful, it’s easy for expenses to spiral out of control — and you could end up making little to no profit. That’s why every business should track revenue and expenses with a profit and loss (P\&L) statement. A P\&L statement helps you measure your company’s financial health and see how your business is really performing.
Here’s a look at what a P\&L statement is, what it includes, and how to use one to gain valuable insights into your business.
**Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.**
## What is a P\&L statement?
A P\&L statement is a financial report that summarizes a company’s revenue, expenses and profit or loss over a fiscal year or quarter. When you read a P\&L statement, you’ll see whether the company is generating sales, managing expenses and earning a profit.
The two main categories outlined in a P\&L statement are income and expenses. Income includes things like product sales, interest earned, commissions and rental income. Expenses include the cost of goods sold (COGS), marketing and advertising fees and taxes.
“A P\&L statement is important for businesses because it gives them a picture of how their business is doing during a given period of time,” explained Jackie Rockwell, co-founder of Brass Jacks, an online bookkeeping academy. “Business owners are often most interested in the bottom line — what is left over after the expenses have been subtracted from the income.”
Publicly traded companies are required to produce three financial reports every quarter: a P\&L statement, a balance sheet and a [cash flow statement](https://www.business.com/articles/what-is-a-cash-flow-statement/).
### Types of profit and loss statements
P\&L statements typically follow one of two formats: single-step or multistep. The type you’ll use depends on your business size, complexity and reporting needs.
- **Single-step P\&L statement:** This format simplifies the process by grouping all income and gains together and all expenses and losses together. Then, it subtracts total expenses from total revenue to show net profit or loss. Single-step P\&L statements are common for small businesses that don’t need to break out operating income separately.
- **Multistep P\&L statement:** This format provides a more detailed view by separating operating income from nonoperating income and expenses. It includes subtotals like gross profit and operating income, giving a clearer picture of core business performance. Larger or GAAP-compliant businesses typically use multistep statements.
### P\&L statement preparation methods
There are two common methods of preparing P\&L statements: [cash accounting and accrual accounting](https://www.business.com/articles/which-is-better-cash-or-accrual-based-business-accounting/).
- **Cash:** This is the most straightforward method, as it measures the actual cash going in and out of a business. It records income when it’s received and expenses when they’re paid. This method is popular among solopreneurs and small businesses because it’s simple and easy to understand.
- **Accrual:** In contrast, the accrual method records revenue when it’s earned and expenses when they’re incurred — regardless of when cash is exchanged. For example, if you deliver a product to a customer but haven’t been paid yet, the accrual method still recognizes the revenue on your P\&L. Companies that follow [Generally Accepted Accounting Principles (GAAP)](https://www.business.com/articles/generally-accepted-accounting-principles/) are required to use accrual accounting.
## How to create and read a profit and loss statement
A P\&L statement is a straightforward and insightful tool that shows how your business is doing financially over a set period. Whether you’re creating one from scratch or reviewing a report generated by your accounting software, here’s how to build and understand a P\&L statement.
### 1\. Choose a reporting period.
Start by selecting the time frame you want to review — usually monthly, quarterly or annually. This period will define which income and expenses you include in the report.
### 2\. Calculate your revenue.
List all sources of income during the reporting period. This includes revenue from your core business activities (like selling products or services) and nonoperating income (like interest earned or the sale of [business assets](https://www.business.com/articles/assets-in-accounting/)).
This is the top line of your P\&L.
### 3\. Calculate your cost of goods sold (COGS).
Next, determine the direct costs involved in producing your goods or services. This might include materials, production labor or [product packaging](https://www.business.com/articles/how-to-package-your-product/). If you run a service business, COGS may include things like subcontractor fees or the cost of billable labor.
Use this formula to calculate COGS:
Beginning Inventory + Purchases – Ending Inventory = COGS
Although COGS is an expense, it’s listed separately for tax purposes — the IRS allows you to deduct COGS from your income before calculating taxable profit.
### 4\. Subtract COGS from revenue to find your gross profit.
Next, you’ll find your gross profit with this formula:
Revenue – COGS = Gross Profit
This number shows how much you made from sales after covering direct production costs. It’s a key indicator of your business’s core profitability.
### 5\. List and total your operating expenses.
Now, list your day-to-day operating expenses. These include [overhead costs](https://www.business.com/articles/overhead-costs/) like rent, marketing, utilities, payroll, office supplies, insurance and software.
These costs are necessary to run your business but don’t directly generate revenue.
### 6\. Subtract expenses from gross profit to find your net income
Next, you’ll subtract your operating expenses from gross profit to find your net income.
Gross Profit – Expenses = Net Income
This is your “bottom line” — what’s left after covering all your business costs. Depending on your accounting method and reporting format, your P\&L may also include additional deductions like interest, taxes, depreciation and amortization. If your net income is positive, you’ve earned a profit. If it’s negative, your business has taken a loss during the reporting period.
### 7\. Review and analyze the results.
Reading a P\&L isn’t just about plugging in numbers — it’s about understanding what they say.
Ask yourself the following questions when reviewing your P\&L statement:
- Are revenues increasing or decreasing?
- Are expenses under control?
- Are certain cost areas eating into your profit?
Your P\&L can help you spot patterns, adjust your budget and make smarter financial decisions moving forward.
## What is included in a P\&L statement?
While we’ve already walked through how to create a P\&L, it’s helpful to see everything that might appear on one — all in one place. Depending on how detailed your report is, a profit and loss statement may include:
- Total revenue
- Cost of goods sold (COGS)
- Gross profit
- Operating expenses
- Selling, general and administrative (SG\&A) expenses
- Marketing and advertising costs
- Research and development (R\&D) expenses
- Depreciation and amortization
- Interest paid
- Taxes (e.g., income taxes)
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Net income (profit or loss)
A P\&L focuses only on income and expenses for a specific period. It doesn’t include your business’s assets, liabilities, or equity — those appear on your [balance sheet](https://www.business.com/articles/boost-balance-sheet/).
When compiling your P\&L statement, look out for [employee accounting fraud](https://www.business.com/articles/preventing-employee-fraud/), such as people padding expenses or creating fictitious expenses.
## Example of a P\&L
Below is a copy of General Motors’ 2018-2020 P\&L statement, which the company refers to as its consolidated income statement.
## Why do businesses need to track P\&L?
If you’re not a publicly traded company with shareholders to report to, you may wonder whether creating a profit and loss statement is necessary. However, Rockwell emphasized that every company should review its P\&L regularly to support smarter [business decision-making](https://www.business.com/articles/business-decision-making-gut-instinct-or-hard-data/).
“While public companies are required to report their financials, private businesses rely on P\&Ls for internal decision-making,” Rockwell explained. “Sometimes it is tempting to just watch the bank balance, but that doesn’t tell the full story. A P\&L helps business owners understand where the company is spending its money and if a pivot needs to occur in order to stay profitable.”
Here are several crucial reasons all businesses should track their profits and losses:
- **Tracking P\&L reveals profitability.** A P\&L statement shows whether your business is profitable by revealing if you’re earning or losing money on the sale of your products or services. Regularly tracking this information can also help you spot opportunities to boost revenue or cut costs — and inspire new ideas to [increase sales](https://www.business.com/articles/12-ways-to-increase-sales/).
- **Tracking P\&L helps you spot trends.** By reviewing your P\&L regularly, you can identify patterns in your financial performance, compare them to [industry trends](https://www.business.com/articles/14-simple-solutions-tracking-industrys-trends/), and make decisions to improve your business. For example, if gross revenue is down, it may be time to find ways to boost sales. Another scenario could be if revenue is steady but net income is falling, which indicates it’s time to look for ways to [cut business costs](https://www.business.com/articles/5-ways-to-drastically-cut-business-costs/). “One of my favorite ways to look at a P\&L is to look at an entire year and divide it up into quarters. This is a really easy way to see trends that occur throughout the year,” Rockwell noted.
- **Tracking P\&L helps you gauge your business’s health**. If you ever [apply for a small business loan](https://www.business.com/articles/how-to-apply-for-a-small-business-loan/), your lender will likely request financial documents like a P\&L statement. This report gives them a snapshot of your business’s financial health and shows whether you’re earning a profit.
## How accounting software can help manage your P\&L statement
Creating a P\&L statement isn’t difficult, and you can certainly do it on your own. However, the process becomes much easier — and more accurate — when you use accounting software. The right platform can help you avoid common [accounting challenges](https://www.business.com/articles/small-business-accounting-challenges/) and costly [accounting mistakes](https://www.business.com/articles/small-business-accounting-mistakes/).
With accounting software, your revenue and expenses are tracked automatically and consistently. That means you can generate a professional P\&L statement with just a few clicks at the end of the quarter or year.
Here are a few great options to consider:
- **QuickBooks Online:** QuickBooks Online offers a robust set of accounting tools for businesses of all sizes and stages. Its ability to generate reports like P\&L statements is unparalleled. The platform automatically categorizes transactions and lets you monitor your company’s cash flow directly from the dashboard. Read our detailed [QuickBooks Online review](https://www.business.com/reviews/quickbooks-online/) for more information.
- **FreshBooks:** FreshBooks is a cloud-based accounting platform you can access from any device. It’s an especially good option for freelancers or business owners who are not well-versed in accounting. The software uses double-entry accounting, so you can easily generate financial reports like P\&L statements and better understand your business’s financial health. You can also invite your accountant to collaborate in your FreshBooks account. Our comprehensive [FreshBooks review](https://www.business.com/reviews/freshbooks-accounting-software-and-invoice-generators/) explains more.
- **Xero:** Xero is an affordable, flexible accounting platform with multiple plan options to fit different business needs. It includes all the essentials for new businesses, along with advanced features like payroll and inventory management. Xero helps you track expenses and monitor your real-time cash position. As explained in our [Xero review](https://www.business.com/reviews/xero-accounting-software/), you can also use the software to generate financial reports and stay organized during tax season.
- **Oracle NetSuite:** Oracle NetSuite is an excellent choice for businesses that want to automate core accounting functions. You’ll only pay for the features you use, making it a smart option for small organizations planning to scale. The platform can reconcile transactions, manage [accounts payable and receivable](https://www.business.com/articles/accounts-payable-vs-receivable/), and generate detailed financial reports. Our updated [Oracle NetSuite review](https://www.business.com/reviews/oracle-netsuite/) shares more about this solution’s features and functionality.
The [best accounting software](https://www.business.com/categories/accounting-software/) for your business will fit your budget, integrate with your other applications, include key [accounting software features](https://www.business.com/articles/features-of-accounting-software/), and have an easy, intuitive interface.
## P\&L statements provide valuable insights into your business
A P\&L statement provides an overview of how much your business is earning and whether you’re making or losing money. Businesses of all sizes can benefit from creating and reviewing a P\&L statement regularly.
If you’re new to P\&L statements, you can start with a template or consider investing in feature-rich accounting software. Platforms like QuickBooks Online and Xero make it easy to track expenses and generate a P\&L statement in seconds. That way, you can stay on top of your finances and be better prepared for tax season. |
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