Every business owner needs to know how their business is tracking, and a profit and loss statement (or P&L statement) is one of the most useful ways to stay on top of your finances.

P&L statements can help you analyse business performance over a month, a quarter, or a year, and are an effective tool to get a good picture of your current cash flow as well as your future business performance.

In this guide, we’ll walk through how a profit and loss statement works, what it can tell you, and how to create one easily.

What is a profit and loss statement?

A profit and loss statement also called a P&L statement, income statement, statement of operations, or statement of earnings, is a summary of a business’s revenue, expenses, and profits or losses over a particular period of time. 

A P&L statement tells you how much money you’re making, and how much you’re losing. You can use a P&L statement to look at your profits and losses over any period you like, but they’re most commonly created for a month, quarter or year.

Why is a profit and loss statement important?

Aside from showing you how your business is performing financially, a P&L statement is helpful for: 

• Developing reasonable sales targets
• Setting prices for your products or services (to keep a healthy profit margin)
• Seeing how your expenses are impacting your net profitability
• Understanding whether you’re bringing in enough of a profit to expand your business

You’ll also need an up-to-date P&L statement to apply for a business loan or if you’re looking for funding from investors. Lenders and investors will look at your net income compared with your expenses to make sure your business is financially healthy enough to lend money to or invest in.

Profit and loss statement vs balance sheet vs cash flow statement

The P&L statement, balance sheet and cash flow statement are three of the most common financial reports you’ll come across as a business owner. 

So what’s the difference? 

As we’ve covered, a P&L statement is an overview of your profits and losses over a particular period of time, such as a month, quarter or year.

A balance sheet, on the other hand, shows your business’s assets and liabilities at a specific point in time rather than over a period. That includes what your business owns, the amount it owes together with the amount that is invested by its shareholders.

A cash flow statement shows you how much cash is coming in and going out of your business. It can help you see how much of your profits are going into your bank account as cash over a certain period.

All three reports are important for understanding your business finances and are often considered by lenders and investors.

Example:

Let’s say you own a candle making business. Last month you sold $1,000 worth of candles and used $400 worth of materials to make candles. Your P&L statement would show these profits and losses, and that your net income for the month is $600.

You also have $200 in cash on hand and inventory worth $200, as well as a $100 debt owing to a supplier. Your balance sheet would show that you have an equity position of $300.

Your cash flow statement would show your cash position as $900 ($1,000 in cash sales + $200 cash in hand - $100 in debt paid).

Profit and loss statement format

There are three main elements of a P&L statement:

1. Revenue

Also called sales or income, revenue includes any money received for the sale of your products or services.

2. Expenses 

Expenses include all your outgoings, such as:

• Cost of goods sold (COGS)
• Overheads such as rent and wages
• Debts
• Marketing and advertising expenses

3. Net profit 

You can calculate your net profit by subtracting all your expenses from your revenue.

Profit and loss statement example

Here’s an example of a simple profit and loss statement:

How to create a profit and loss statement with QuickBooks

A profit and loss statement is essential for tracking your business finances, but manually one every month, quarter or year takes time and effort. QuickBooks Online includes a handy profit and loss statement template, which makes it easy to create your own customised statement in just a few clicks. QuickBooks automatically records and organises your financial information, so it's quick and easy to access and create up-to-date financial statements whenever you need them.

So how does it work?

QuickBooks Online uses subtotals for each income and expense account in your chart of accounts to show your:

• Total revenue
• Gross profit
• Expenses 
• Net income or loss

You can click on any number in the totals column to get a detailed transaction list for that particular item, and even automatically calculate each expense as a percentage of your income to track overspend or underspend.

Find out more about QuickBooks reports and start your free trial today.