It's important for business owners to be able to track how their business is performing. One of the best ways to stay on top of your business' finances is by using a profit and loss statement or P&L statement.

P&L statements help you analyse the performance of your business over a specific time period, whether that be a month, a quarter, or a year, and provide a clear picture of your current cash flown as well as insights into your future business performance.

In this article, you'll learn 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?

Beyond providing you with a snapshot of how your business is performing financially, P&L statements are also useful when: 

• Developing reasonable sales targets
• Setting prices for products or services (to keep a healthy profit margin)
• Seeing the impact your expenses are having net profitability
• Understanding whether you’re making enough profit to expand your business

You’ll also need an up-to-date P&L statement when applying for a business loan or if you’re seeking funding from investors. Lenders and investors will want look at your net income compared with your expenses to assess whether or not your business is financially healthy enough to lend to or invest in.

The difference between a profit and loss statement, a balance sheet, and a cash flow statement

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

A P&L statement provides an overview of your profits and losses over a specific time period, such as a month, quarter or year.

A balance sheet shows your business’ assets and liabilities at a specific point in time instead of over a certain timeframe. That includes what your business owns and the amount it owes with the amount that has been invested by its shareholders.

A cash flow statement captures how much cash is coming in and out of your business, meaning you can see how much profit is going into your bank account as cash over a certain time period.

All three reports are important for understanding your business' finances and are often used 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

When pulling together a P&L statement, there are three main elements that you should include:

1. Revenue

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

2. Expenses 

Expenses include all outgoing costs, such as:

• Cost of goods sold (COGS)
• Overheads, like rent and wages
• Debts
• Marketing and advertising costs

3. Net profit 

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

Profit and loss statement example

A simple profit and loss statement may look as follows:

How to create a profit and loss statement with QuickBooks

A profit and loss statement is essential for tracking your business finances, but it takes time and effort to manually create one every month, quarter or year.

QuickBooks Online includes a handy profit and loss statement template, making 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.

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 and get a detailed transaction list for that particular item, then automatically calculate each expense as a percentage of your income so you can track over or underspend.

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