What are profit and loss statements used for?

A profit and loss (P&L) statement reflects the profitability of your business and can help inform assessments of financial sustainability when used alongside other financial data. It’s one of the three main financial statements used by businesses, along with a balance sheet and cash flow statement. 

A P&L statement indicates a profit when your business revenue exceeds your expenses. If expenses exceed revenue, the statement will show a net loss. This document can provide valuable insight into your overall business strategy, day-to-day operations and company trends.

Here are some ways a profit and loss statement can help business owners understand their financial performance:

Overall business strategy

• Is revenue covering costs and expenses?
• Can the business owner afford to pay themselves?
• What is the return on investment (ROI) on business expenses?

Day-to-day operations

• Top- and low-earning revenue streams
• Top spending categories
• Gross margin, calculated as (revenue − cost of goods sold) ÷ revenue
• Areas to lower spending

Company trends

• The business’s financial progress over a specific time period
• Factors impacting profitability and revenue growth
• The company’s sales patterns compared to industry trends

What is included in a profit and loss statement

Typically, a profit and loss statement includes the following five main sections:

1. Income/Revenue: Total amount received from sales of goods or services.
2. Cost of goods sold: COGS includes the direct costs of producing goods or services, such as materials and direct labor.
3. General expenses: Business overhead costs not included in COGS, such as administrative payroll, utilities, hardware, software and travel.
4. Other income or expenses: Irregular transactions not associated with daily operations.
5. Net income: The final figure on your P&L statement that indicates your profit or loss.

Example of a simple profit and loss statement

The following is an example of a simple P&L statement:

Income or revenue

Each income or expense category has its own line showing the total earned or spent. If you use subcategories, your profit and loss statement will include a subtotal of the subcategories.

Cost of goods sold

The following is an example outlining COGS:

Net income

Your net income makes up the final section of a profit and loss statement. The following formula demonstrates how to calculate net income:

Net income = (Income – COGS – Expenses – Other expenses) + Other income

This sample portion of a P and L statement shows how you arrive at net income:

A positive net income means you’ve earned more than you spent. If your net income is negative, it means you’ve spent more than you earned, and your business has incurred a loss.

Understanding information on a profit and loss statement

In addition to the grand totals of the five major sections discussed, you’ll note other line items on a typical profit and loss statement, which include the following:

Gross profit

The gross profit total line comes directly after the COGS section. This figure tells you how much you actually earned after subtracting the costs of selling your product or service from your revenue. The gross profit is what you have remaining to apply toward your operating expenses to keep your business operating.

Gross profit = Revenue – Cost of goods sold

Profit does not always equal available cash. A company may report profit while experiencing cash flow constraints due to debt payments, inventory purchases or owner distributions.

Net operating income

The net operating income line appears under the general expenses section of your P&L statement. This figure represents your net income after subtracting operating expenses and costs from your revenue. It doesn’t include irregular income or expenses. Net operating income is the core earnings remaining after day-to-day expenses.

Net operating income = Income – COGS – Expenses

Other income and expenses

The other income and other expenses lines highlight uncommon income and expenditures. These lines let you review and discount infrequent transactions, making it easy to budget around these amounts.

• Other income: Can include dividends, investments, earned interest and one-time income from unusual sources.
• Other expenses: Can include non-operating or infrequent costs such as penalties or legal settlements, whereas depreciation is typically included in operating expenses and taxes are often reported separately.

Putting all the sections together, your P&L statement might appear like this:

How to create a profit and loss statement

A variety of digital bookkeeping services make it easy to prepare a profit and loss statement. The following steps can help you create a P&L statement for your business:

1. Add lines for your income, costs, expenses and other income/expenses.
2. Add up the categories in each section.
3. Subtract costs and expenses from revenue, then add other income and subtract other expenses.
4. At the end, make a line for net income.

A profit and loss statement helps you measure revenue, costs and net income to assess financial health. Reviewing it regularly highlights trends, guides spending decisions and supports long-term strategy. This simple report is essential for tracking progress and supporting your business’s sustainability.

Simple Profit & Loss Template for PDF & Word

Use this simple profit and loss template to track your business’s revenue and expenses.