âšď¸ Skipped - page is already crawled
| Filter | Status | Condition | Details |
|---|---|---|---|
| HTTP status | PASS | download_http_code = 200 | HTTP 200 |
| Age cutoff | PASS | download_stamp > now() - 6 MONTH | 0 months ago |
| History drop | PASS | isNull(history_drop_reason) | No drop reason |
| Spam/ban | PASS | fh_dont_index != 1 AND ml_spam_score = 0 | ml_spam_score=0 |
| Canonical | PASS | meta_canonical IS NULL OR = '' OR = src_unparsed | Not set |
| Property | Value |
|---|---|
| URL | https://www.waveapps.com/blog/profit-and-loss-statement |
| Last Crawled | 2026-04-10 18:53:10 (1 day ago) |
| First Indexed | 2023-10-20 15:16:12 (2 years ago) |
| HTTP Status Code | 200 |
| Meta Title | What Is a Profit and Loss Statement? A Simple Guide for Beginners |
| Meta Description | Learn what a profit and loss statement is, why it matters for your business, and how to read one with ease. Understand key terms, examples, and take control of your finances today. |
| Meta Canonical | null |
| Boilerpipe Text | Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Table of contents
June 20, 2025
5 minutes read
If youâre running a small business, youâre well aware that good tools make all the difference in how you spend your time, money, and energy. One of the best tools? A profit and loss (P&L) statement.
Also known as an
income statement
, a
P&L gives you a clear picture of how much money your business is bringing in and how much is going out over a specific period of time.
Itâs like a snapshot of your financial performance and then some. You can use it to guide decisions, spot trends, and keep your operations on track.
While a P&L statement is crucial on its own, itâs just one star of the story we like to call
Small Business Success.
Supporting characters include the balance sheet (showing you what you own and owe) and the cash flow statement (which tracks the movement of cash in and out of your business).
And because every good story has a villain, letâs introduce ours: no P&L at all.
Because in business, ignoring your P&L is like skipping the script and hoping the ending works out just fine. Risky at best, and more often than not, just plain costly.
Keep reading to find out more about your favorite main character and how to seamlessly incorporate the P&L into your business story with Wave.
How do profit and loss (P&L) statements work?
A profit and loss statement is all about financial health. It shows a companyâs gains and expenses over a set period of time.
But like we mentioned above, it doesn't work alone.
A profit and loss statement is part of a trifecta of financial statements that every public company must issue on a quarterly and annual basis. These statements include the following: balance sheet, cash flow statement, and the P&L report.
To create your P&L, youâll follow a simple formula:
Profit (or Loss) = Total Income â Total Expenses
Start with your total income
: This is all the money your business earned during the period.Â
Subtract your expenses
: This is everything your business spent to operate. For example: rent, marketing costs, wages, etc.
â
Calculate your net profit or loss:
The number youâll end up with is your profit or loss. If your income is higher than your expenses, thatâs a profit. Expenses higher than income? Thatâs a loss.
Example: Profit and loss statement
â
More a visual learner? Weâve put together this example of a profit and loss statement, shown here.
What is a P&L statement used for?Â
A P&L statement is a tool that helps you stay in control of your numbers and the financial health of your business. It gives you real insight into how your business is performing and where it might need attention. Thatâs why keeping it updated is critical.
For instance, if youâre looking to answer the question thatâs always in the back of your mindâ
is my business actually making money
âyour P&L doesn't just give you a yes or no. It tells the whole story.
By comparing your income and expenses month-to-month or year-over-year, youâre able to track growth, identify trends, and measure the impact of your business decisions. Yes, even your decision to finally launch a TikTok account and a quirky mascot you can only hope will rival Duolingoâs iconic bird. (Good luck.)
In addition to uncovering the key plot points of your financial story, profit and loss statements can also help you simplify budgeting and planning. You can use it to help set realistic revenue goals, forecast expenses, and plan for upcoming investments, like equipment upgrades, hiring, or new marketing initiatives.
Profit and loss statements are also helpful for tax season.
They
organize your financial data in one place, making it simpler to file returns, claim deductions, and answer any questions from your accountant.
Last but not least,
P&Ls are must-haves when communicating with investors.
It shows that you understand your business, that youâre tracking its performance, and that youâre serious about making money (which can make them more serious about investing in you).
Profit and loss vs. other financial statements
The profit and loss statement is just one part of your financial toolkit.
While it shows how much money your business earned and spent over a specific time period, it works best when viewed alongside two other key reports: the
balance sheet
and the
cash flow statement
.
A
balance sheet
gives you a snapshot of your businessâs financial position at a single moment in time. It shows what you
own
(assets) versus what you
owe
(liabilities), plus the equity youâve built.
The
cash flow statement
tracks the actual movement of money in and out of your business. This might be from things like operations, investments, or financing.
In short, the following three statements give you the full story of your financial health:
The
P&L
tracks income and expenses over time
The
balance sheet
captures assets and liabilities at a specific point in time
The
cash flow statement
reveals how money actually
moves
through your business
Keep reading for a more detailed breakdown.
P&L statement vs. balance sheet
Think of your
P&L statement
and
balance sheet
as two different snapshots of your business: one shows movement, the other shows position. A
balance sheet
captures the following three pieces:
Everything your business
owns
(assets)
Everything your business
owes
(liabilities)
Whatâs
left over for you
(equity) at a specific point in time.
Itâs like hitting pause and seeing exactly where you stand financially at any specific time.
In contrast, the P&L statement
tells the story of how your business has performed over a set period, typically a month, quarter, or year. It focuses on income and expenses, showing whether you made a profit or took a loss during that time.
Think of it this way: while the balance sheet shows what you
have
, the P&L shows how you got there.
As weâve outlined below, your P&L reflects all the income
minus
all the expenses for that period. It âbridges the gapâ between a balance sheet at the start of the period and a balance sheet at the end.
P&L statement vs. cash flow statement
While your
P&L statement
shows whether your business is profitable over time, the
cash flow statement
reveals how money actually moves in and out of your business.
For example: youâre a web designer who just landed your dream project. But just because the handshake was firm, it doesnât mean youâve got the cash in hand.
This is where your cash flow statement comes in.
It gives you a view of the cash thatâs coming in and out of your business, helping you track liquidity and make sure you can cover your bills, payroll, and other obligations until those dollars come in. Which, if you use Wave,
might be sooner than you think
.
How to read a P&L statement (line-by-line guide)
Revenue
Definition
: This type of entry brings in your net sales (i.e. whatâs leftover after deductionsâlike returns, allowances and discountsâthat have been subtracted from gross sales) or receipts during the accounting period. It also includes the revenue earned from the primary operating activity of your business, plus non-operating revenue.
Purpose:
To see how much money youâre generating from your day-to-day operations
â
Examples:
In the example of a freelance web designer, your revenue would come from (you guessed it) designing websites.
Cost of goods sold
Definition:
These are the direct costs tied to creating your product or delivering your service. Essentially, what you spend to do the work you get paid for.Â
Purpose:
COGS helps you see how much money you're spending to get the job done. The higher this number, the more it eats into your profits. Yuck.
â
Example:
If youâre a freelance web designer, your COGS might include software licenses (hi, Adobe), subcontractor fees for that *chefâs kiss* of a freelance copywriter youâve hired, or templates youâve purchased to help build the site.
Gross profit
Definition:
This is after you subtract your COGS from your total revenue:
Revenue â COGS = Gross profit.
Purpose:
Gross profit tells you how much youâre actually earning from your services or products before overhead and other expenses come into play.
Example:
Youâve just charged $5,000 for a website, but spent $1,200 on a copywriter and design tools to complete it. In this scenario, your gross profit for the job would be $3,800.
Operating expenses
Definition
: These are the non-direct, day-to-day costs of running your business
Purpose:
Operating expenses are the funds you spend to keep the lights on (quite literally). Think of them as the âbehind the scenesâ support.
â
Example:
Your office rent, payroll, internet bill,
invoicing software that helps you stop chasing clients around and gets you paid fast and easily
âyou know, the good stuff.
Other expenses
Definition
: These are costs that arenât part of your core operations. They might be a surprise cost or an infrequent expense.Â
Purpose:
Although âother expensesâ can be unexpected, unplanned, or infrequent, they can impact your bottom line. Thatâs why theyâre important to track.
â
Example:
Were your taxes done by your best-friendâs siblingâs neighbour whoâs âlooking to get into the bizâ? Gulp. You might be in for an unexpected tax bill at the end of the year. File that one under âOther expenses.â
Net income
Definition:
This is your actual profit. Itâs whatâs left over after all your expenses are paid. To get it, follow this formula:
Gross profit â Operating expenses + Other income â Other expenses = Net income.
Purpose:
Thereâs a reason net income is called âbottom lineâ. It tells you if your business is actually making money once everything is tallied up.
â
Example:
Youâve paid that surprise tax bill, all your software costs, office rent, and fees for your copywriterâand wow!âyou still have $5,200 left at the end of the month. Thatâs your net income. And yes, you should be celebrating đ
How to prepare a profit and loss (P&L) statement
If you're not using
super simple accounting software like Wave's
, you can still prepare a P&L statement manually. Hereâs a step-by-step breakdown to help you get started:
Add up your revenue:
Calculate your total revenue for the time period youâre reviewingâthis could be monthly, quarterly, or annually. Be sure to use your
net sales
, which means your gross sales minus any returns, discounts, or allowances.
Add up your COGS:
Add the direct costs associated with running your business. For example: direct labor and materials costs, shipping and delivery fees, or things like production costs.
Calculate your gross profit:
Subtract your COGS from your revenue. (Revenue â COGS = Gross profit).
Add up your operating and other expenses:
List out all your operating expenses (the day-to-day costs of running your business that arenât tied directly to production). This includes rent, wages, software subscriptions, utilities, and marketing. It can also include any non-operating expenses like loan interest or taxes.
Calculate your net profit (or loss): Finally, subtract your total expenses from your gross profit with this formula:
Gross profit â Total expenses = Net profit
.
Manually creating a P&L is a great way to get familiar with your numbers, especially when you're just starting out. But as your business grows, manual spreadsheets can get a little... messy. Manual P&Ls can be time-consuming, prone to errors, and not exactly how you want to be spending your working hours (or your well-deserved time off).
The good news?
Manual
isnât in the
Wave
vocabulary đ
Common mistakes to avoid
When preparing or reviewing your P&L statement, a few common slip-ups can throw off your numbers, especially if youâre doing things the old fashioned wayâaka manually.
One of the biggest mistakes is mixing personal finances with your business ones. This makes tracking expenses and measuring profitability much harder.
Misclassifying expenses is another one to watch out for. This can lead to inaccurate totals and skewed insights. And donât forget about tax liabilities. Overlooking them can make your profit look healthier than it really is. A little extra attention here can save you a lot of confusion and cleanup later.
Who should prepare a P&L and how often?
If youâre a small business owner or freelancer, reviewing your profit and loss (P&L) statement regularly isnât just a good habit, itâs essential. Here are just two reasons why:Â
Control:
Staying on top of your numbers means youâre
in control of your business,
with the insights to make smart decisions and plan for whatâs ahead. Checking in on your P&L at least once a month (or even more often!) will help you track progress, catch issues early, and compare performance over time.
Insight:
Itâs not just about knowing that youâre profitableâitâs about understanding
how
your profits are changing over time, and more importantly, whatâs driving those changes.
But we get it. Youâre busy and five steps to create a P&L statement can feel like a little too much in the too-little time you have.
Thatâs where Wave can help
.
With Wave, your P&L updates every time you record a transaction, so your financial picture is always up to date.
Profit and loss statement FAQs
Do all companies need to prepare P&L statements?
No, itâs not mandatory for private companies to prepare P&L statements, but publicly traded companies are required to do so.
That said, even small and private businesses still file them. They can be incredibly valuable, helping you monitor your financial health.
Moving ahead with profit and loss statements
Profit and loss statements are essential for understanding your businessâs financial health.
Pair it with your cash flow statement and balance sheet, and youâve got the full financial story of your business. And if you want to feel like a real P&L pro, layer in previous P&Ls to spot trends, identify red flags, and youâll start forecasting like a wizard. Itâs your data-driven crystal ball, helping you make informed decisions as your business grows.
Remember, while P&L statements arenât always required (unless youâre a public company), theyâre
always
useful, and when made with Wave, theyâre easy.
Wave will generate your P&Ls, cash flow statements, and balance sheets all in one place. No spreadsheets. No off-hours work. Just total clarity.
Ready to make business decisions backed by real numbers and, better yet, to remove âmanual mathâ off your already-packed agenda?
Get started with Wave today
.
P.S. Looking for the Oscar-worthy version of P&L statements? Take a look at
our video
to learn more about preparing your income statement, and what you can find when you do. đŽ
pro
Plan
$16
USD
$20
CAD/mo
Option to accept online payments
Starting at
2.9%
+ $0.60
per credit card transaction
Starting at
2.9%
+ $0*
per credit card transactionâ¨for first 10 transactions/mo
Unlimited invoices, estimates, bills
Add your logo and brand colors
Automate late payment reminders
with online payments
Wave mobile app
Unlimited bookkeeping records
Dashboard and reports
Auto-import transactions
Auto-merge transactions
Auto-categorize transactions
Add users
Live-person chat and email support
with any paid add-on
Digitally capture unlimited receipts
additional fee
Payroll
additional fee
additional fee
Hire a bookkeeper
additional fee
additional fee
Option to accept online payments
Starting at
2.9%
+ $0.60
per credit card transaction
Starting at
2.9%
+ $0*
per credit card transactionâ¨for first 10 transactions/mo
Unlimited invoices, estimates, bills
Add your logo and brand colors
Automate late payment reminders
with online payments
Wave mobile app
Unlimited bookkeeping records
Dashboard and reports
Auto-import transactions
Auto-merge transactions
Auto-categorize transactions
Add users
Live-person chat and email support
with any paid add-on
Digitally capture unlimited receipts
additional fee
Payroll
additional fee
additional fee
Hire a bookkeeper
additional fee
additional fee
Invoicing + payments
Option to accept online payments
(and create unique links with checkouts)
Starting at
2.9%
+ $0.60
per credit card transaction
Starting at
2.9%
+ $0.60
per credit card transaction
Starting at
2.9%
+ $0*
per credit card transactionâ¨for first 10 transactions/mo
Send invoices, estimates, and other docs:
via links or PDFs
automatically, via Wave
with online payments
with online payments
Automate late payment reminders
with online payments
with online payments
Add your logo and brand colors
Remove Wave branding from footers
Add attachments to invoices and estimates (NEW!)
Create reusable message templates (NEW!)
Invoice and estimate in the mobile app
Accounting
Unlimited bookkeeping records
Auto-import bank transactions
Auto-merge and categorize transactions
Add users to your business
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of
May 1, 2024
Digitally capture unlimited receipts
with receipts add-on
with receipts add-on
Manage accounting transactions in the mobile app and sync with desktop (NEW!)
with receipts add-on
with receipts add-on
Other Wave features
Dashboard and reports
Live-person chat + email support
with any optional add-on
with any optional add-on
Optional add-ons
Receipts
nothing changes
additional fee
included
Payroll
nothing changes
additional fee
additional fee
Advisors
nothing changes
additional fee
additional fee
Invoicing + payments
Option to accept online payments
(and create unique links with checkouts)
Starting at
2.9%
+ $0.60
per credit card transaction
Starting at
2.9%
+ $0.60
per credit card transaction
Starting at
2.9%
+ $0*
per credit card transaction for first 10 transactions/mo
Send invoices, estimates, and other docs via links or PDFs
Send invoices, estimates, and other docs automatically, via Wave
with online payments
with online payments
Automate late payment reminders
with online payments
with online payments
Add your logo and brand colors
Remove Wave branding from footers
Add attachments to invoices and estimates (NEW!)
Create reusable message templates (coming NEW!)
Invoice and estimate in the mobile app
Accounting
Unlimited bookkeeping records
Auto-import, -merge, and -categorize bank transactions
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of
May 1, 2024
Add users to your business
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of
May 1, 2024
Digitally capture unlimited receipts
with receipts add-on
with receipts add-on
Manage accounting transactions in the mobile app and sync with desktop (NEW!)
with receipts add-on
with receipts add-on
Other Wave features
Dashboard and reports
Live-person chat + email support
with any optional add-on
with any optional add-on
Optional add-ons
Receipts
nothing changes
additional fee
included
Payroll
nothing changes
additional fee
additional fee
Advisors
nothing changes
additional fee
additional fee
*While subscribed to Waveâs Pro Plan, get 2.9% + $0 (Visa, Mastercard, Discover) and 3.4% + $0 (Amex) per transaction for the first 10 transactions of each month of your subscription, then 2.9% + $0.60 (Visa, Mastercard, Discover) and 3.4% + $0.60 (Amex) per transaction. Discover processing is only available to US customers. See full terms and conditions for
the US
and
Canada
. See Waveâs
Terms of Service
for more information.
By Rachelle Waterman
Categories:
Disclaimer
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: âAll content on Waveâs blog is intended for informational purposes only. It should not be considered legal or financial advice.â Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.
Read next
Financial software that helps you run your business and pay your team better.
You didn't start your business to be a bookkeeper |
| Markdown | [Skip to Main Content](https://www.waveapps.com/blog/profit-and-loss-statement)
[](https://www.waveapps.com/)
Solutions
Stay organized & tax-ready
[Accounting Track income and expenses for more accurate books](https://www.waveapps.com/accounting)
[Receipts Scan and store receipts to track and organize expenses](https://www.waveapps.com/receipts)
[Mobile app Manage invoices, expenses, and receipts on-the-go](https://www.waveapps.com/wave-app)
Get paid
[Invoicing Send professional invoices and wow clients](https://www.waveapps.com/invoicing)
[Estimates & Deposits Create estimates and collect deposits to secure projects](https://www.waveapps.com/estimates-software)
[Payments Accept credit cards and bank payments to get paid fast](https://www.waveapps.com/payments)
Pay yourself & your team
[Payroll Run payroll for employees or contractors with peace of mind](https://www.waveapps.com/payroll)
[Let Wave do the heavy-lifting  Pro plan Look polished and save time on admin tasks](https://www.waveapps.com/pro)
[Advisors](https://www.waveapps.com/wave-advisors)[Pricing](https://www.waveapps.com/pricing)
Resources
[Blog](https://www.waveapps.com/blog)
[Bookkeeping & Accounting](https://www.waveapps.com/blog-category/bookkeeping-and-accounting)
[Small business taxes](https://www.waveapps.com/blog-category/taxes)
[Business planning](https://www.waveapps.com/blog-category/business-planning)
[Cash flow](https://www.waveapps.com/blog-category/cash-flow)
[Financial statements](https://www.waveapps.com/blog-category/financial-statements)
[Entrepreneurship](https://www.waveapps.com/blog-category/entrepreneurship)
Tax season prep
- [Small business tax season guide](https://www.waveapps.com/blog/the-complete-guide-to-small-business-tax-season)
- [Tax season checklist](https://www.waveapps.com/blog/get-ready-for-tax-season-checklist)
- [What is a profit and loss statement?](https://www.waveapps.com/blog/profit-and-loss-statement)
- [What is a balance sheet?](https://www.waveapps.com/blog/what-is-a-balance-sheet)
Bookkeeping how-tos
- [Small business bookkeeping guide](https://www.waveapps.com/blog/how-to-do-bookkeeping-for-small-businesses)
- [Daily bookkeeping checklist](https://www.waveapps.com/blog/small-business-daily-bookkeeping-checklist)
- [Month-end accounting checklist](https://www.waveapps.com/blog/small-business-month-end-checklist)
- [What is a cash flow statement?](https://www.waveapps.com/blog/cash-flow-statement)
Compare Wave
- [Wave vs. QuickBooks](https://www.waveapps.com/compare/quickbooks-alternative)
- [Wave vs. Honeybook](https://www.waveapps.com/compare/wave-vs-honeybook)
- [Wave vs. Freshbooks](https://www.waveapps.com/compare/freshbooks-vs-wave)
- [Wave vs. Xero](https://www.waveapps.com/compare/xero-vs-wave)
- [Wave vs. Zipbooks](https://www.waveapps.com/compare/zipbooks-vs-wave)
- [Wave vs. Sage](https://www.waveapps.com/compare/sage-vs-wave)
Support
[How support works](https://www.waveapps.com/help)
[Help center](https://support.waveapps.com/)
[Status page](https://status.waveapps.com/)
[Tax Readiness](https://www.waveapps.com/tax-season)
[Log in](https://www.waveapps.com/login)
[Get started for freeGet started for free](https://www.waveapps.com/register)
[Your account](https://my.waveapps.com/)
Solutions
Back
Stay organized & tax-ready
[Accounting Track income and expenses for more accurate books](https://www.waveapps.com/accounting)
[Receipts Scan and store receipts to track and organize expenses](https://www.waveapps.com/receipts)
[Mobile app Manage invoices, expenses, and receipts on-the-go](https://www.waveapps.com/wave-app)
Get paid
[Invoicing Send professional invoices and wow clients](https://www.waveapps.com/invoicing)
[Estimates & Deposits Create estimates and collect deposits to secure projects](https://www.waveapps.com/estimates-software)
[Payments Accept credit cards and bank payments to get paid fast](https://www.waveapps.com/payments)
Pay yourself & your team
[Payroll Run payroll for employees or contractors with peace of mind](https://www.waveapps.com/payroll)
[Advisors](https://www.waveapps.com/wave-advisors)[Pricing](https://www.waveapps.com/pricing)
Resources
Back
Support
[How support works](https://www.waveapps.com/help)
[Help center](https://support.waveapps.com/)
[Status page](https://status.waveapps.com/)
Blog
Compare Wave
- [Wave vs. QuickBooks](https://www.waveapps.com/compare/quickbooks-alternative)
- [Wave vs. Honeybook](https://www.waveapps.com/compare/wave-vs-honeybook)
- [Wave vs. Freshbooks](https://www.waveapps.com/compare/freshbooks-vs-wave)
- [Wave vs. Xero](https://www.waveapps.com/compare/xero-vs-wave)
- [Wave vs. Zipbooks](https://www.waveapps.com/compare/zipbooks-vs-wave)
- [Wave vs. Sage](https://www.waveapps.com/compare/sage-vs-wave)
[Tax Readiness](https://www.waveapps.com/tax-season)
[Let Wave do the heavy-lifting  Pro plan Look polished and save time on admin tasks](https://www.waveapps.com/pro)
Back
[Blog](https://www.waveapps.com/blog)
[Bookkeeping & Accounting](https://www.waveapps.com/blog-category/bookkeeping-and-accounting)
[Small business taxes](https://www.waveapps.com/blog-category/taxes)
[Business planning](https://www.waveapps.com/blog-category/business-planning)
[Cash flow](https://www.waveapps.com/blog-category/cash-flow)
[Financial statements](https://www.waveapps.com/blog-category/financial-statements)
[Entrepreneurship](https://www.waveapps.com/blog-category/entrepreneurship)
Tax season prep
- [Small business tax season guide](https://www.waveapps.com/blog/the-complete-guide-to-small-business-tax-season)
- [Tax season checklist](https://www.waveapps.com/blog/get-ready-for-tax-season-checklist)
- [What is a profit and loss statement?](https://www.waveapps.com/blog/profit-and-loss-statement)
- [What is a balance sheet?](https://www.waveapps.com/blog/what-is-a-balance-sheet)
Bookkeeping how-tos
- [Small business bookkeeping guide](https://www.waveapps.com/blog/how-to-do-bookkeeping-for-small-businesses)
- [Daily bookkeeping checklist](https://www.waveapps.com/blog/small-business-daily-bookkeeping-checklist)
- [Month-end accounting checklist](https://www.waveapps.com/blog/small-business-month-end-checklist)
- [What is a cash flow statement?](https://www.waveapps.com/blog/cash-flow-statement)
[Log in](https://www.waveapps.com/login)
[Get started for freeGet started for free](https://www.waveapps.com/register)
[Your account](https://my.waveapps.com/)
[](https://www.waveapps.com/)
[Get started for free](https://www.waveapps.com/register)
[Bookkeeping & Accounting](https://www.waveapps.com/blog-category/bookkeeping-and-accounting)
[Business planning](https://www.waveapps.com/blog-category/business-planning)
[Cash flow](https://www.waveapps.com/blog-category/cash-flow)
[Entrepreneurship](https://www.waveapps.com/blog-category/entrepreneurship)
[Financial statements](https://www.waveapps.com/blog-category/financial-statements)
[Small business taxes](https://www.waveapps.com/blog-category/taxes)
Regional
Florida
[How to Get a Business License in Florida: The Ultimate Guide](https://www.waveapps.com/blog/how-to-get-a-business-license-in-florida)
[The Ultimate Guide to Business Taxes in Florida](https://www.waveapps.com/blog/business-taxes-in-florida)
[The Best Small Business Grants in Florida](https://www.waveapps.com/blog/the-best-small-business-grants-in-florida)
[How to Start a Business in Florida: A Step-by-Step Guide](https://www.waveapps.com/blog/how-to-start-a-business-in-florida)
[How to Start an LLC in Florida: The Ultimate Guide](https://www.waveapps.com/blog/how-to-start-an-llc-in-florida)
Ohio
[The Ultimate Guide to Ohio Small Business Grants](https://www.waveapps.com/blog/ohio-small-business-grants)
[How to Get a Business License in Ohio: The Ultimate Guide](https://www.waveapps.com/blog/how-to-get-a-business-license-in-ohio)
[How to Start a Business in Ohio: A Step-by-Step Guide](https://www.waveapps.com/blog/how-to-start-a-business-in-ohio)
Texas
[How to Get a Business License in Texas: The Ultimate Guide](https://www.waveapps.com/blog/how-to-get-a-business-license-in-texas)
[How to Start a Business in Texas: The Ultimate Guide](https://www.waveapps.com/blog/how-to-start-a-business-in-texas)
Oops! Something went wrong while submitting the form.
Thank you! Your submission has been received\!
Oops! Something went wrong while submitting the form.
Table of contents
[Heading 1](https://www.waveapps.com/blog/profit-and-loss-statement)
[Heading 1](https://www.waveapps.com/blog/profit-and-loss-statement)
# What is a profit and loss statement?
By [Rachelle Waterman](https://www.waveapps.com/authors/rachelle-waterman)
By Rachelle Waterman
June 20, 2025
5 minutes read
[Financial statements](https://www.waveapps.com/blog-category/financial-statements)
[Bookkeeping & Accounting](https://www.waveapps.com/blog-category/bookkeeping-and-accounting)
If youâre running a small business, youâre well aware that good tools make all the difference in how you spend your time, money, and energy. One of the best tools? A profit and loss (P\&L) statement.
Also known as an [income statement](https://www.waveapps.com/blog/what-is-an-income-statement), a **P\&L gives you a clear picture of how much money your business is bringing in and how much is going out over a specific period of time.** Itâs like a snapshot of your financial performance and then some. You can use it to guide decisions, spot trends, and keep your operations on track.
While a P\&L statement is crucial on its own, itâs just one star of the story we like to call *Small Business Success.* Supporting characters include the balance sheet (showing you what you own and owe) and the cash flow statement (which tracks the movement of cash in and out of your business).
And because every good story has a villain, letâs introduce ours: no P\&L at all.
Because in business, ignoring your P\&L is like skipping the script and hoping the ending works out just fine. Risky at best, and more often than not, just plain costly.
Keep reading to find out more about your favorite main character and how to seamlessly incorporate the P\&L into your business story with Wave.
## How do profit and loss (P\&L) statements work?
A profit and loss statement is all about financial health. It shows a companyâs gains and expenses over a set period of time.
But like we mentioned above, it doesn't work alone.
A profit and loss statement is part of a trifecta of financial statements that every public company must issue on a quarterly and annual basis. These statements include the following: balance sheet, cash flow statement, and the P\&L report.
To create your P\&L, youâll follow a simple formula: **Profit (or Loss) = Total Income â Total Expenses**
- **Start with your total income**: This is all the money your business earned during the period.
- **Subtract your expenses**: This is everything your business spent to operate. For example: rent, marketing costs, wages, etc.
- â**Calculate your net profit or loss:** The number youâll end up with is your profit or loss. If your income is higher than your expenses, thatâs a profit. Expenses higher than income? Thatâs a loss.
**Example: Profit and loss statement â**More a visual learner? Weâve put together this example of a profit and loss statement, shown here.
## What is a P\&L statement used for?
A P\&L statement is a tool that helps you stay in control of your numbers and the financial health of your business. It gives you real insight into how your business is performing and where it might need attention. Thatâs why keeping it updated is critical.
For instance, if youâre looking to answer the question thatâs always in the back of your mindâ*is my business actually making money*âyour P\&L doesn't just give you a yes or no. It tells the whole story.
By comparing your income and expenses month-to-month or year-over-year, youâre able to track growth, identify trends, and measure the impact of your business decisions. Yes, even your decision to finally launch a TikTok account and a quirky mascot you can only hope will rival Duolingoâs iconic bird. (Good luck.)
In addition to uncovering the key plot points of your financial story, profit and loss statements can also help you simplify budgeting and planning. You can use it to help set realistic revenue goals, forecast expenses, and plan for upcoming investments, like equipment upgrades, hiring, or new marketing initiatives. **Profit and loss statements are also helpful for tax season.** Theyorganize your financial data in one place, making it simpler to file returns, claim deductions, and answer any questions from your accountant.
Last but not least, **P\&Ls are must-haves when communicating with investors.** It shows that you understand your business, that youâre tracking its performance, and that youâre serious about making money (which can make them more serious about investing in you).
## Profit and loss vs. other financial statements
The profit and loss statement is just one part of your financial toolkit.
While it shows how much money your business earned and spent over a specific time period, it works best when viewed alongside two other key reports: the **balance sheet** and the **cash flow statement**.
A [balance sheet](https://www.waveapps.com/blog/balance-sheet-example) gives you a snapshot of your businessâs financial position at a single moment in time. It shows what you *own* (assets) versus what you *owe* (liabilities), plus the equity youâve built.
The [cash flow statement](https://www.waveapps.com/blog/cash-flow-statement) tracks the actual movement of money in and out of your business. This might be from things like operations, investments, or financing.
In short, the following three statements give you the full story of your financial health:
- The **P\&L** tracks income and expenses over time
- The **balance sheet** captures assets and liabilities at a specific point in time
- The **cash flow statement** reveals how money actually *moves* through your business
Keep reading for a more detailed breakdown.
### P\&L statement vs. balance sheet
Think of your **P\&L statement** and **balance sheet** as two different snapshots of your business: one shows movement, the other shows position. A **balance sheet** captures the following three pieces:
- Everything your business *owns* (assets)
- Everything your business *owes* (liabilities)
- Whatâs *left over for you* (equity) at a specific point in time.
Itâs like hitting pause and seeing exactly where you stand financially at any specific time.
In contrast, the P\&L statementtells the story of how your business has performed over a set period, typically a month, quarter, or year. It focuses on income and expenses, showing whether you made a profit or took a loss during that time.
Think of it this way: while the balance sheet shows what you *have*, the P\&L shows how you got there.
As weâve outlined below, your P\&L reflects all the income *minus* all the expenses for that period. It âbridges the gapâ between a balance sheet at the start of the period and a balance sheet at the end.
### P\&L statement vs. cash flow statement
While your **P\&L statement** shows whether your business is profitable over time, the **cash flow statement** reveals how money actually moves in and out of your business.
For example: youâre a web designer who just landed your dream project. But just because the handshake was firm, it doesnât mean youâve got the cash in hand.
This is where your cash flow statement comes in.
It gives you a view of the cash thatâs coming in and out of your business, helping you track liquidity and make sure you can cover your bills, payroll, and other obligations until those dollars come in. Which, if you use Wave, [might be sooner than you think](https://www.waveapps.com/estimates-software).
## How to read a P\&L statement (line-by-line guide)
### Revenue
- **Definition**: This type of entry brings in your net sales (i.e. whatâs leftover after deductionsâlike returns, allowances and discountsâthat have been subtracted from gross sales) or receipts during the accounting period. It also includes the revenue earned from the primary operating activity of your business, plus non-operating revenue.
- **Purpose:** To see how much money youâre generating from your day-to-day operations
- â**Examples:** In the example of a freelance web designer, your revenue would come from (you guessed it) designing websites.
### Cost of goods sold
- **Definition:** These are the direct costs tied to creating your product or delivering your service. Essentially, what you spend to do the work you get paid for.
- **Purpose:** COGS helps you see how much money you're spending to get the job done. The higher this number, the more it eats into your profits. Yuck.
- â**Example:** If youâre a freelance web designer, your COGS might include software licenses (hi, Adobe), subcontractor fees for that \*chefâs kiss\* of a freelance copywriter youâve hired, or templates youâve purchased to help build the site.
### Gross profit
- **Definition:** This is after you subtract your COGS from your total revenue: *Revenue â COGS = Gross profit.*
- **Purpose:** Gross profit tells you how much youâre actually earning from your services or products before overhead and other expenses come into play.
- **Example:** Youâve just charged \$5,000 for a website, but spent \$1,200 on a copywriter and design tools to complete it. In this scenario, your gross profit for the job would be \$3,800.
### Operating expenses
- **Definition**: These are the non-direct, day-to-day costs of running your business
- **Purpose:** Operating expenses are the funds you spend to keep the lights on (quite literally). Think of them as the âbehind the scenesâ support.
- â**Example:** Your office rent, payroll, internet bill, [invoicing software that helps you stop chasing clients around and gets you paid fast and easily](https://www.waveapps.com/invoicing)âyou know, the good stuff.
### Other expenses
- **Definition**: These are costs that arenât part of your core operations. They might be a surprise cost or an infrequent expense.
- **Purpose:** Although âother expensesâ can be unexpected, unplanned, or infrequent, they can impact your bottom line. Thatâs why theyâre important to track.**â**
- **Example:** Were your taxes done by your best-friendâs siblingâs neighbour whoâs âlooking to get into the bizâ? Gulp. You might be in for an unexpected tax bill at the end of the year. File that one under âOther expenses.â
### Net income
- **Definition:** This is your actual profit. Itâs whatâs left over after all your expenses are paid. To get it, follow this formula: **Gross profit â Operating expenses + Other income â Other expenses = Net income.**
- **Purpose:** Thereâs a reason net income is called âbottom lineâ. It tells you if your business is actually making money once everything is tallied up.
- â**Example:** Youâve paid that surprise tax bill, all your software costs, office rent, and fees for your copywriterâand wow!âyou still have \$5,200 left at the end of the month. Thatâs your net income. And yes, you should be celebrating đ
## How to prepare a profit and loss (P\&L) statement
If you're not using [super simple accounting software like Wave's](https://www.waveapps.com/accounting), you can still prepare a P\&L statement manually. Hereâs a step-by-step breakdown to help you get started:
1. **Add up your revenue:** Calculate your total revenue for the time period youâre reviewingâthis could be monthly, quarterly, or annually. Be sure to use your *net sales*, which means your gross sales minus any returns, discounts, or allowances.
2. **Add up your COGS:** Add the direct costs associated with running your business. For example: direct labor and materials costs, shipping and delivery fees, or things like production costs.
3. **Calculate your gross profit:** Subtract your COGS from your revenue. (Revenue â COGS = Gross profit).
4. **Add up your operating and other expenses:** List out all your operating expenses (the day-to-day costs of running your business that arenât tied directly to production). This includes rent, wages, software subscriptions, utilities, and marketing. It can also include any non-operating expenses like loan interest or taxes.
5. Calculate your net profit (or loss): Finally, subtract your total expenses from your gross profit with this formula: **Gross profit â Total expenses = Net profit**.
Manually creating a P\&L is a great way to get familiar with your numbers, especially when you're just starting out. But as your business grows, manual spreadsheets can get a little... messy. Manual P\&Ls can be time-consuming, prone to errors, and not exactly how you want to be spending your working hours (or your well-deserved time off).
The good news? *Manual* isnât in the [Wave](https://www.waveapps.com/accounting) vocabulary đ
## Common mistakes to avoid
When preparing or reviewing your P\&L statement, a few common slip-ups can throw off your numbers, especially if youâre doing things the old fashioned wayâaka manually.
One of the biggest mistakes is mixing personal finances with your business ones. This makes tracking expenses and measuring profitability much harder.
Misclassifying expenses is another one to watch out for. This can lead to inaccurate totals and skewed insights. And donât forget about tax liabilities. Overlooking them can make your profit look healthier than it really is. A little extra attention here can save you a lot of confusion and cleanup later.
## Who should prepare a P\&L and how often?
If youâre a small business owner or freelancer, reviewing your profit and loss (P\&L) statement regularly isnât just a good habit, itâs essential. Here are just two reasons why:
- **Control:** Staying on top of your numbers means youâre **in control of your business,** with the insights to make smart decisions and plan for whatâs ahead. Checking in on your P\&L at least once a month (or even more often!) will help you track progress, catch issues early, and compare performance over time.
- **Insight:** Itâs not just about knowing that youâre profitableâitâs about understanding *how* your profits are changing over time, and more importantly, whatâs driving those changes.
But we get it. Youâre busy and five steps to create a P\&L statement can feel like a little too much in the too-little time you have. [Thatâs where Wave can help](https://www.waveapps.com/accounting).
With Wave, your P\&L updates every time you record a transaction, so your financial picture is always up to date.
## Profit and loss statement FAQs
### Do all companies need to prepare P\&L statements?
No, itâs not mandatory for private companies to prepare P\&L statements, but publicly traded companies are required to do so.
That said, even small and private businesses still file them. They can be incredibly valuable, helping you monitor your financial health.
## Moving ahead with profit and loss statements
Profit and loss statements are essential for understanding your businessâs financial health.
Pair it with your cash flow statement and balance sheet, and youâve got the full financial story of your business. And if you want to feel like a real P\&L pro, layer in previous P\&Ls to spot trends, identify red flags, and youâll start forecasting like a wizard. Itâs your data-driven crystal ball, helping you make informed decisions as your business grows.
Remember, while P\&L statements arenât always required (unless youâre a public company), theyâre *always* useful, and when made with Wave, theyâre easy.
Wave will generate your P\&Ls, cash flow statements, and balance sheets all in one place. No spreadsheets. No off-hours work. Just total clarity.
Ready to make business decisions backed by real numbers and, better yet, to remove âmanual mathâ off your already-packed agenda? [Get started with Wave today](https://www.waveapps.com/accounting).
P.S. Looking for the Oscar-worthy version of P\&L statements? Take a look at [our video](https://www.youtube.com/watch?v=T-RPCg4WCp0) to learn more about preparing your income statement, and what you can find when you do. đŽ
starter
Plan
[Select plan](https://www.waveapps.com/blog/profit-and-loss-statement)
pro
Plan
[Select plan](https://www.waveapps.com/blog/profit-and-loss-statement)
starter
Plan
\$0
pro
Plan
\$16USD
\$20CAD/mo
Option to accept online payments
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Unlimited invoices, estimates, bills
Add your logo and brand colors
Automate late payment reminders
with online payments
Wave mobile app
Unlimited bookkeeping records
Dashboard and reports
Auto-import transactions
Auto-merge transactions
Auto-categorize transactions
Add users
Live-person chat and email support
with any paid add-on
Digitally capture unlimited receipts
additional fee
Payroll
additional fee
additional fee
Hire a bookkeeper
additional fee
additional fee
Option to accept online payments
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Unlimited invoices, estimates, bills
Add your logo and brand colors
Automate late payment reminders
with online payments
Wave mobile app
Unlimited bookkeeping records
Dashboard and reports
Auto-import transactions
Auto-merge transactions
Auto-categorize transactions
Add users
Live-person chat and email support
with any paid add-on
Digitally capture unlimited receipts
additional fee
Payroll
additional fee
additional fee
Hire a bookkeeper
additional fee
additional fee
starter
Plan
\$0
**Legacy businesses**
**New businesses**
pro
Plan
\$19
USD or
\$25
CAD/month
starter
Plan
\$0
**Legacy businesses**
**New businesses**
pro
Plan
\$19
USD or
\$25
CAD/month
Invoicing + payments
Option to accept online payments
(and create unique links with checkouts)
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Send invoices, estimates, and other docs:
- via links or PDFs
- automatically, via Wave
with online payments
with online payments
Automate late payment reminders
with online payments
with online payments
Add your logo and brand colors
Remove Wave branding from footers
Add attachments to invoices and estimates (NEW!)
Create reusable message templates (NEW!)
Invoice and estimate in the mobile app
Accounting
Unlimited bookkeeping records
Auto-import bank transactions
Auto-merge and categorize transactions
Add users to your business
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of **May 1, 2024**
Digitally capture unlimited receipts
with receipts add-on
with receipts add-on
Manage accounting transactions in the mobile app and sync with desktop (NEW!)
with receipts add-on
with receipts add-on
Other Wave features
Dashboard and reports
Live-person chat + email support
with any optional add-on
with any optional add-on
Optional add-ons
Receipts
nothing changes
additional fee
included
Payroll
nothing changes
additional fee
additional fee
Advisors
nothing changes
additional fee
additional fee
Invoicing + payments
Option to accept online payments
(and create unique links with checkouts)
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Send invoices, estimates, and other docs via links or PDFs
Send invoices, estimates, and other docs automatically, via Wave
with online payments
with online payments
Automate late payment reminders
with online payments
with online payments
Add your logo and brand colors
Remove Wave branding from footers
Add attachments to invoices and estimates (NEW!)
Create reusable message templates (coming NEW!)
Invoice and estimate in the mobile app
Accounting
Unlimited bookkeeping records
Auto-import, -merge, and -categorize bank transactions
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of **May 1, 2024**
Add users to your business
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of **May 1, 2024**
Digitally capture unlimited receipts
with receipts add-on
with receipts add-on
Manage accounting transactions in the mobile app and sync with desktop (NEW!)
with receipts add-on
with receipts add-on
Other Wave features
Dashboard and reports
Live-person chat + email support
with any optional add-on
with any optional add-on
Optional add-ons
Receipts
nothing changes
additional fee
included
Payroll
nothing changes
additional fee
additional fee
Advisors
nothing changes
additional fee
additional fee
\*While subscribed to Waveâs Pro Plan, get 2.9% + \$0 (Visa, Mastercard, Discover) and 3.4% + \$0 (Amex) per transaction for the first 10 transactions of each month of your subscription, then 2.9% + \$0.60 (Visa, Mastercard, Discover) and 3.4% + \$0.60 (Amex) per transaction. Discover processing is only available to US customers. See full terms and conditions for [the US](https://www.waveapps.com/legal/wave-payments-terms-of-service-united-states) and [Canada](https://www.waveapps.com/legal/wave-payments-terms-of-service-canada). See Waveâs [Terms of Service](https://www.waveapps.com/legal/wave-subscriptions-terms-of-service) for more information.
##
## Related Posts
No items found.
By Rachelle Waterman
Categories:
[Financial statements](https://www.waveapps.com/blog-category/financial-statements)
[Bookkeeping & Accounting](https://www.waveapps.com/blog-category/bookkeeping-and-accounting)
Disclaimer
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: âAll content on Waveâs blog is intended for informational purposes only. It should not be considered legal or financial advice.â Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.
## Read next
[Tax forms for small businesses in the United States Know exactly which IRS forms your small business needs â returns by entity, 1099-NEC, W-2/941/940, Form 4562, estimates, extensions â plus checklists to stay compliant.](https://www.waveapps.com/blog/us-small-business-tax-forms)
[Tax credits and deductions for sole proprietors in Canada Filing as a Canadian sole proprietor? Learn deductions and creditsâhome office, vehicle, CCA, GST/HST, and moreâplus how Wave keeps you CRA-ready.](https://www.waveapps.com/blog/sole-proprietor-tax-credits-deductions-canada)
[Tax credits and deductions for LLCs â 2026 guide Running an LLC? Learn the top 2026 deductions and tax credits â Section 179, QBI, home office, and more â plus how Wave keeps you organized and IRS-ready.](https://www.waveapps.com/blog/llc-tax-credits-deductions)
# Financial software that helps you run your business and pay your team better.
# You didn't start your business to be a bookkeeper
[Get started for free](https://www.waveapps.com/register)
[](https://www.facebook.com/sharer/sharer.php?u=https://www.waveapps.com/blog/accounting-and-taxes)[](https://www.linkedin.com/shareArticle?mini=true&url=https://www.waveapps.com/blog/accounting-and-taxes&title=&summary=test&source=)[](mailto:?subject=Accounting%20%26%20taxesWave%20Blog&body=Accounting%20%26%20taxes%20Wave%20Blog%0A%0Ahttps%3A%2F%2Fwww.waveapps.com%2Fblog%2Faccounting-and-taxes)
[](https://www.waveapps.com/)
[](https://www.facebook.com/WaveHQ/)[](https://www.instagram.com/wave_hq/)[](https://ca.linkedin.com/company/wave-hq)[](https://www.youtube.com/channel/UC7HjEprcJT0b3-jqVMRLjIQ)
## Features
- [Accounting](https://www.waveapps.com/accounting)
- [Invoicing](https://www.waveapps.com/invoicing)
- [Estimates](https://www.waveapps.com/estimates-software)
- [Wave app](https://www.waveapps.com/wave-app)
- [Receipts](https://www.waveapps.com/receipts)
- [Payments](https://www.waveapps.com/payments)
- [Payroll](https://www.waveapps.com/payroll)
- [Advisors](https://www.waveapps.com/wave-advisors)
- [Pricing](https://www.waveapps.com/pricing)
- [Credit card payments](https://www.waveapps.com/payments/credit-cards)
- [Bank payments](https://www.waveapps.com/payments/bank-payments)
- [Recurring billing](https://www.waveapps.com/payments/recurring-billing)
## Wave
- [About Us](https://www.waveapps.com/about-us/about)
- [Careers](https://www.waveapps.com/about-us/careers)
- [Press](https://www.waveapps.com/press)
- [Become an affiliate](https://www.waveapps.com/affiliate)
- [Sitemap](https://www.waveapps.com/sitemap)
## Helpful Links
- [Blog](https://www.waveapps.com/blog)
- [Help Center](https://support.waveapps.com/)
- [Invoice templates](https://www.waveapps.com/invoice-templates)
- [Estimate templates](https://www.waveapps.com/estimate-templates)
- [Accounting education center](https://www.waveapps.com/accounting-education-center)
- [Payroll education center](https://www.waveapps.com/payroll-education-center)
- [QuickBooks alternative](https://www.waveapps.com/compare/quickbooks-alternative)
- [Freelance Hub](https://www.waveapps.com/freelancing)
- [Small business study](https://www.waveapps.com/microbusiness-payments-report)
## Support & Tools
- [How support works](https://www.waveapps.com/help)
- [System status](https://status.waveapps.com/)
- [Accounting calculators](https://www.waveapps.com/tools-category/accounting)
- [Invoicing generators](https://www.waveapps.com/tools-category/invoicing)
- [Payroll calculators](https://www.waveapps.com/tools-category/payroll)
Copyright Š 2010-2026 Wave Financial Inc. All Rights Reserved.
- [Privacy Policy](https://www.waveapps.com/legal/privacy-policy)
- [Legal Disclosures](https://www.waveapps.com/legal/legal-disclosures)
- [Security](https://www.waveapps.com/legal/security-and-privacy)
- [Licensing](https://www.waveapps.com/legal/licensing)
- [Accessibility](https://www.waveapps.com/legal/accessibility)
- [Social Media Disclaimer](https://www.waveapps.com/legal/social-media-disclaimer)
- [Privacy Choices](https://submit-irm.trustarc.com/services/validation/30d6b3c9-92d3-4ace-96ab-0f9fc15ed537)
[Back to top](https://www.waveapps.com/blog/profit-and-loss-statement#page-wrapper) |
| Readable Markdown | Thank you! Your submission has been received\!
Oops! Something went wrong while submitting the form.
Table of contents
June 20, 2025
5 minutes read
If youâre running a small business, youâre well aware that good tools make all the difference in how you spend your time, money, and energy. One of the best tools? A profit and loss (P\&L) statement.
Also known as an [income statement](https://www.waveapps.com/blog/what-is-an-income-statement), a **P\&L gives you a clear picture of how much money your business is bringing in and how much is going out over a specific period of time.** Itâs like a snapshot of your financial performance and then some. You can use it to guide decisions, spot trends, and keep your operations on track.
While a P\&L statement is crucial on its own, itâs just one star of the story we like to call *Small Business Success.* Supporting characters include the balance sheet (showing you what you own and owe) and the cash flow statement (which tracks the movement of cash in and out of your business).
And because every good story has a villain, letâs introduce ours: no P\&L at all.
Because in business, ignoring your P\&L is like skipping the script and hoping the ending works out just fine. Risky at best, and more often than not, just plain costly.
Keep reading to find out more about your favorite main character and how to seamlessly incorporate the P\&L into your business story with Wave.
## How do profit and loss (P\&L) statements work?
A profit and loss statement is all about financial health. It shows a companyâs gains and expenses over a set period of time.
But like we mentioned above, it doesn't work alone.
A profit and loss statement is part of a trifecta of financial statements that every public company must issue on a quarterly and annual basis. These statements include the following: balance sheet, cash flow statement, and the P\&L report.
To create your P\&L, youâll follow a simple formula: **Profit (or Loss) = Total Income â Total Expenses**
- **Start with your total income**: This is all the money your business earned during the period.
- **Subtract your expenses**: This is everything your business spent to operate. For example: rent, marketing costs, wages, etc.
- â**Calculate your net profit or loss:** The number youâll end up with is your profit or loss. If your income is higher than your expenses, thatâs a profit. Expenses higher than income? Thatâs a loss.
**Example: Profit and loss statement â**More a visual learner? Weâve put together this example of a profit and loss statement, shown here.
## What is a P\&L statement used for?
A P\&L statement is a tool that helps you stay in control of your numbers and the financial health of your business. It gives you real insight into how your business is performing and where it might need attention. Thatâs why keeping it updated is critical.
For instance, if youâre looking to answer the question thatâs always in the back of your mindâ*is my business actually making money*âyour P\&L doesn't just give you a yes or no. It tells the whole story.
By comparing your income and expenses month-to-month or year-over-year, youâre able to track growth, identify trends, and measure the impact of your business decisions. Yes, even your decision to finally launch a TikTok account and a quirky mascot you can only hope will rival Duolingoâs iconic bird. (Good luck.)
In addition to uncovering the key plot points of your financial story, profit and loss statements can also help you simplify budgeting and planning. You can use it to help set realistic revenue goals, forecast expenses, and plan for upcoming investments, like equipment upgrades, hiring, or new marketing initiatives.**Profit and loss statements are also helpful for tax season.**Theyorganize your financial data in one place, making it simpler to file returns, claim deductions, and answer any questions from your accountant.
Last but not least, **P\&Ls are must-haves when communicating with investors.** It shows that you understand your business, that youâre tracking its performance, and that youâre serious about making money (which can make them more serious about investing in you).
## Profit and loss vs. other financial statements
The profit and loss statement is just one part of your financial toolkit.
While it shows how much money your business earned and spent over a specific time period, it works best when viewed alongside two other key reports: the **balance sheet** and the **cash flow statement**.
A [balance sheet](https://www.waveapps.com/blog/balance-sheet-example) gives you a snapshot of your businessâs financial position at a single moment in time. It shows what you *own* (assets) versus what you *owe* (liabilities), plus the equity youâve built.
The [cash flow statement](https://www.waveapps.com/blog/cash-flow-statement) tracks the actual movement of money in and out of your business. This might be from things like operations, investments, or financing.
In short, the following three statements give you the full story of your financial health:
- The **P\&L** tracks income and expenses over time
- The **balance sheet** captures assets and liabilities at a specific point in time
- The **cash flow statement** reveals how money actually *moves* through your business
Keep reading for a more detailed breakdown.
### P\&L statement vs. balance sheet
Think of your **P\&L statement** and **balance sheet** as two different snapshots of your business: one shows movement, the other shows position. A **balance sheet** captures the following three pieces:
- Everything your business *owns* (assets)
- Everything your business *owes* (liabilities)
- Whatâs *left over for you* (equity) at a specific point in time.
Itâs like hitting pause and seeing exactly where you stand financially at any specific time.
In contrast, the P\&L statementtells the story of how your business has performed over a set period, typically a month, quarter, or year. It focuses on income and expenses, showing whether you made a profit or took a loss during that time.
Think of it this way: while the balance sheet shows what you *have*, the P\&L shows how you got there.
As weâve outlined below, your P\&L reflects all the income *minus* all the expenses for that period. It âbridges the gapâ between a balance sheet at the start of the period and a balance sheet at the end.
### P\&L statement vs. cash flow statement
While your **P\&L statement** shows whether your business is profitable over time, the **cash flow statement** reveals how money actually moves in and out of your business.
For example: youâre a web designer who just landed your dream project. But just because the handshake was firm, it doesnât mean youâve got the cash in hand.
This is where your cash flow statement comes in.
It gives you a view of the cash thatâs coming in and out of your business, helping you track liquidity and make sure you can cover your bills, payroll, and other obligations until those dollars come in. Which, if you use Wave, [might be sooner than you think](https://www.waveapps.com/estimates-software).
## How to read a P\&L statement (line-by-line guide)
### Revenue
- **Definition**: This type of entry brings in your net sales (i.e. whatâs leftover after deductionsâlike returns, allowances and discountsâthat have been subtracted from gross sales) or receipts during the accounting period. It also includes the revenue earned from the primary operating activity of your business, plus non-operating revenue.
- **Purpose:** To see how much money youâre generating from your day-to-day operations
- â**Examples:** In the example of a freelance web designer, your revenue would come from (you guessed it) designing websites.
### Cost of goods sold
- **Definition:** These are the direct costs tied to creating your product or delivering your service. Essentially, what you spend to do the work you get paid for.
- **Purpose:** COGS helps you see how much money you're spending to get the job done. The higher this number, the more it eats into your profits. Yuck.
- â**Example:** If youâre a freelance web designer, your COGS might include software licenses (hi, Adobe), subcontractor fees for that \*chefâs kiss\* of a freelance copywriter youâve hired, or templates youâve purchased to help build the site.
### Gross profit
- **Definition:** This is after you subtract your COGS from your total revenue: *Revenue â COGS = Gross profit.*
- **Purpose:** Gross profit tells you how much youâre actually earning from your services or products before overhead and other expenses come into play.
- **Example:** Youâve just charged \$5,000 for a website, but spent \$1,200 on a copywriter and design tools to complete it. In this scenario, your gross profit for the job would be \$3,800.
### Operating expenses
- **Definition**: These are the non-direct, day-to-day costs of running your business
- **Purpose:** Operating expenses are the funds you spend to keep the lights on (quite literally). Think of them as the âbehind the scenesâ support.
- â**Example:** Your office rent, payroll, internet bill, [invoicing software that helps you stop chasing clients around and gets you paid fast and easily](https://www.waveapps.com/invoicing)âyou know, the good stuff.
### Other expenses
- **Definition**: These are costs that arenât part of your core operations. They might be a surprise cost or an infrequent expense.
- **Purpose:** Although âother expensesâ can be unexpected, unplanned, or infrequent, they can impact your bottom line. Thatâs why theyâre important to track.**â**
- **Example:** Were your taxes done by your best-friendâs siblingâs neighbour whoâs âlooking to get into the bizâ? Gulp. You might be in for an unexpected tax bill at the end of the year. File that one under âOther expenses.â
### Net income
- **Definition:** This is your actual profit. Itâs whatâs left over after all your expenses are paid. To get it, follow this formula: **Gross profit â Operating expenses + Other income â Other expenses = Net income.**
- **Purpose:** Thereâs a reason net income is called âbottom lineâ. It tells you if your business is actually making money once everything is tallied up.
- â**Example:** Youâve paid that surprise tax bill, all your software costs, office rent, and fees for your copywriterâand wow!âyou still have \$5,200 left at the end of the month. Thatâs your net income. And yes, you should be celebrating đ
## How to prepare a profit and loss (P\&L) statement
If you're not using [super simple accounting software like Wave's](https://www.waveapps.com/accounting), you can still prepare a P\&L statement manually. Hereâs a step-by-step breakdown to help you get started:
1. **Add up your revenue:** Calculate your total revenue for the time period youâre reviewingâthis could be monthly, quarterly, or annually. Be sure to use your *net sales*, which means your gross sales minus any returns, discounts, or allowances.
2. **Add up your COGS:** Add the direct costs associated with running your business. For example: direct labor and materials costs, shipping and delivery fees, or things like production costs.
3. **Calculate your gross profit:** Subtract your COGS from your revenue. (Revenue â COGS = Gross profit).
4. **Add up your operating and other expenses:** List out all your operating expenses (the day-to-day costs of running your business that arenât tied directly to production). This includes rent, wages, software subscriptions, utilities, and marketing. It can also include any non-operating expenses like loan interest or taxes.
5. Calculate your net profit (or loss): Finally, subtract your total expenses from your gross profit with this formula: **Gross profit â Total expenses = Net profit**.
Manually creating a P\&L is a great way to get familiar with your numbers, especially when you're just starting out. But as your business grows, manual spreadsheets can get a little... messy. Manual P\&Ls can be time-consuming, prone to errors, and not exactly how you want to be spending your working hours (or your well-deserved time off).
The good news? *Manual* isnât in the [Wave](https://www.waveapps.com/accounting) vocabulary đ
## Common mistakes to avoid
When preparing or reviewing your P\&L statement, a few common slip-ups can throw off your numbers, especially if youâre doing things the old fashioned wayâaka manually.
One of the biggest mistakes is mixing personal finances with your business ones. This makes tracking expenses and measuring profitability much harder.
Misclassifying expenses is another one to watch out for. This can lead to inaccurate totals and skewed insights. And donât forget about tax liabilities. Overlooking them can make your profit look healthier than it really is. A little extra attention here can save you a lot of confusion and cleanup later.
## Who should prepare a P\&L and how often?
If youâre a small business owner or freelancer, reviewing your profit and loss (P\&L) statement regularly isnât just a good habit, itâs essential. Here are just two reasons why:
- **Control:** Staying on top of your numbers means youâre **in control of your business,** with the insights to make smart decisions and plan for whatâs ahead. Checking in on your P\&L at least once a month (or even more often!) will help you track progress, catch issues early, and compare performance over time.
- **Insight:** Itâs not just about knowing that youâre profitableâitâs about understanding *how* your profits are changing over time, and more importantly, whatâs driving those changes.
But we get it. Youâre busy and five steps to create a P\&L statement can feel like a little too much in the too-little time you have. [Thatâs where Wave can help](https://www.waveapps.com/accounting).
With Wave, your P\&L updates every time you record a transaction, so your financial picture is always up to date.
## Profit and loss statement FAQs
### Do all companies need to prepare P\&L statements?
No, itâs not mandatory for private companies to prepare P\&L statements, but publicly traded companies are required to do so.
That said, even small and private businesses still file them. They can be incredibly valuable, helping you monitor your financial health.
## Moving ahead with profit and loss statements
Profit and loss statements are essential for understanding your businessâs financial health.
Pair it with your cash flow statement and balance sheet, and youâve got the full financial story of your business. And if you want to feel like a real P\&L pro, layer in previous P\&Ls to spot trends, identify red flags, and youâll start forecasting like a wizard. Itâs your data-driven crystal ball, helping you make informed decisions as your business grows.
Remember, while P\&L statements arenât always required (unless youâre a public company), theyâre *always* useful, and when made with Wave, theyâre easy.
Wave will generate your P\&Ls, cash flow statements, and balance sheets all in one place. No spreadsheets. No off-hours work. Just total clarity.
Ready to make business decisions backed by real numbers and, better yet, to remove âmanual mathâ off your already-packed agenda? [Get started with Wave today](https://www.waveapps.com/accounting).
P.S. Looking for the Oscar-worthy version of P\&L statements? Take a look at [our video](https://www.youtube.com/watch?v=T-RPCg4WCp0) to learn more about preparing your income statement, and what you can find when you do. đŽ
pro
Plan
\$16USD
\$20CAD/mo
Option to accept online payments
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Unlimited invoices, estimates, bills
Add your logo and brand colors
Automate late payment reminders
with online payments
Wave mobile app
Unlimited bookkeeping records
Dashboard and reports
Auto-import transactions
Auto-merge transactions
Auto-categorize transactions
Add users
Live-person chat and email support
with any paid add-on
Digitally capture unlimited receipts
additional fee
Payroll
additional fee
additional fee
Hire a bookkeeper
additional fee
additional fee
Option to accept online payments
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Unlimited invoices, estimates, bills
Add your logo and brand colors
Automate late payment reminders
with online payments
Wave mobile app
Unlimited bookkeeping records
Dashboard and reports
Auto-import transactions
Auto-merge transactions
Auto-categorize transactions
Add users
Live-person chat and email support
with any paid add-on
Digitally capture unlimited receipts
additional fee
Payroll
additional fee
additional fee
Hire a bookkeeper
additional fee
additional fee
Invoicing + payments
Option to accept online payments
(and create unique links with checkouts)
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Send invoices, estimates, and other docs:
- via links or PDFs
- automatically, via Wave
with online payments
with online payments
Automate late payment reminders
with online payments
with online payments
Add your logo and brand colors
Remove Wave branding from footers
Add attachments to invoices and estimates (NEW!)
Create reusable message templates (NEW!)
Invoice and estimate in the mobile app
Accounting
Unlimited bookkeeping records
Auto-import bank transactions
Auto-merge and categorize transactions
Add users to your business
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of **May 1, 2024**
Digitally capture unlimited receipts
with receipts add-on
with receipts add-on
Manage accounting transactions in the mobile app and sync with desktop (NEW!)
with receipts add-on
with receipts add-on
Other Wave features
Dashboard and reports
Live-person chat + email support
with any optional add-on
with any optional add-on
Optional add-ons
Receipts
nothing changes
additional fee
included
Payroll
nothing changes
additional fee
additional fee
Advisors
nothing changes
additional fee
additional fee
Invoicing + payments
Option to accept online payments
(and create unique links with checkouts)
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0.60**
per credit card transaction
Starting at
2\.9% **\+ \$0\***
per credit card transaction for first 10 transactions/mo
Send invoices, estimates, and other docs via links or PDFs
Send invoices, estimates, and other docs automatically, via Wave
with online payments
with online payments
Automate late payment reminders
with online payments
with online payments
Add your logo and brand colors
Remove Wave branding from footers
Add attachments to invoices and estimates (NEW!)
Create reusable message templates (coming NEW!)
Invoice and estimate in the mobile app
Accounting
Unlimited bookkeeping records
Auto-import, -merge, and -categorize bank transactions
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of **May 1, 2024**
Add users to your business
businesses already auto-importing bank transactions and/or that already have users added to their businesses as of **May 1, 2024**
Digitally capture unlimited receipts
with receipts add-on
with receipts add-on
Manage accounting transactions in the mobile app and sync with desktop (NEW!)
with receipts add-on
with receipts add-on
Other Wave features
Dashboard and reports
Live-person chat + email support
with any optional add-on
with any optional add-on
Optional add-ons
Receipts
nothing changes
additional fee
included
Payroll
nothing changes
additional fee
additional fee
Advisors
nothing changes
additional fee
additional fee
\*While subscribed to Waveâs Pro Plan, get 2.9% + \$0 (Visa, Mastercard, Discover) and 3.4% + \$0 (Amex) per transaction for the first 10 transactions of each month of your subscription, then 2.9% + \$0.60 (Visa, Mastercard, Discover) and 3.4% + \$0.60 (Amex) per transaction. Discover processing is only available to US customers. See full terms and conditions for [the US](https://www.waveapps.com/legal/wave-payments-terms-of-service-united-states) and [Canada](https://www.waveapps.com/legal/wave-payments-terms-of-service-canada). See Waveâs [Terms of Service](https://www.waveapps.com/legal/wave-subscriptions-terms-of-service) for more information.
By Rachelle Waterman
Categories:
Disclaimer
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: âAll content on Waveâs blog is intended for informational purposes only. It should not be considered legal or financial advice.â Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.
Read next
Financial software that helps you run your business and pay your team better.
You didn't start your business to be a bookkeeper |
| Shard | 147 (laksa) |
| Root Hash | 2538305968827168547 |
| Unparsed URL | com,waveapps!www,/blog/profit-and-loss-statement s443 |