What is a profit and loss (P&L) statement: Definition, examples, and template

Small business owners know their exact financial standing despite endless changing variables. With countless transactions, overlapping terms like “revenue” vs. “income,” but only a single bottom line, it can be difficult to pull everything together. The solution is a well-crafted profit-and-loss (P&L) statement. 

But what is a profit and loss statement for a business, exactly, and how do you calculate every line item? This blog will break down the core components of a P&L statement, how it adds clarity to your bookkeeping, and highlight the manual steps and formulas to calculate each entry.

With a strong base knowledge and the best AI accounting software for small businesses in your tech stack, you can join 95% of accountants who are automating their processes to get the granular insight needed to keep profit margins strong and boost your bottom line.

What is the format of a profit & loss (P&L) statement?

A profit and loss (P&L) statement, also known as an income statement, is a snapshot of a company's sales and expenses over a period of time. It shows company revenues, expenses, and net income over that period. The bottom line on a P&L is net income, also known as profit or loss. P&L statements are a core component of proper small business bookkeeping. 

The profit and loss formula is:

Revenue - Expenses = Profit or loss

There are many ways to format a P&L statement, but all versions include the same basic information. Sales are at the top of the statement, while expenses appear below. The profit or loss is the difference between the two.

While many businesses hire a bookkeeper or use accounting software, having a strong foundation in this core business concept makes small business owners better equipped to make financial decisions. Let’s take a closer look at the main components of a profit and loss statement.

Revenue

Revenue is the money your business makes from selling goods or services and is gathered from receipts and invoices. It’s the very first line on the profit and loss statement. Note there are two types of revenue: 

• Gross revenue, or total revenue or sales, is the total amount you make before accounting for discounts, returns, or expenses.
• Net revenue, also known as net sales, is the money you make after deducting discounts and returns. 

Note that net revenue is gross revenue minus discounts and returns.

Expenses

The expenses of a business include all the costs to generate revenue. 

Cost of goods sold (COGS) is the cost of materials and labor a company uses to make a product or service. It’s also known as the cost of sales. The costs can include raw materials or direct wages for employees. But also certain overhead costs, such as utilities. 

COGS are expenses that show up on the top part of the P&L before gross profit. Gross profit is the money you make from sales after subtracting your cost of goods sold, using the formula: 

Gross profit = Net revenue - Cost of goods sold

Other expenses can be operating or non-operating. 

Operating expenses are the costs of running your business. While COGS are for making a product, operating expenses are the costs to support that process. Operating expenses include:

• Rent
• Marketing costs
• Salaries for admin staff
• Depreciation
• Licensing fees

Non-operating expenses are costs not part of your core operations. These include taxes, fines, legal fees, and interest. Non-operating expenses include anything unlikely to happen again. For example, losses due to shutting down a business operation.

Income

Income is how much money you make in your business. There are two key types of income—operating and net income. 

Operating income is a business's income from its core operations. It excludes non-operating expenses, such as taxes or interest expenses. This type of income measures how well a company generates money from its main business. The formula for operating income is:

Operating income = Gross profit - Operating expenses

Net income is your bottom line—the last item on your P&L. It's the money left after subtracting all expenses.

Net income = revenue - COGS - Operating expenses - Non-operating expenses

Net income comes after both operating and non-operating expenses on the P&L. It’s a measure of the money left over for shareholders or owners.

How to generate a profit and loss statement (step-by-step)

The P&L will include three key components—revenue, expenses, and income. These components help you understand where your business is doing well, where you may be able to cut costs, and how much you’re earning after covering those expenses. 

Though you can put a profit and loss statement together from scratch, using a profit and loss statement template is far easier. For example, our template includes space for the three components and helps you organize your information in a usable way.

Let’s look at how you can use the template to create a functional profit and loss statement for your business.

1. Start with revenue

Determine what period you want to create a profit and loss statement for. This can be any period, but it’s generally best practice to put together a P&L monthly to help identify trends. 

You’ll want to calculate your gross revenue ‌for that period and list it on the top line of your P&L statement.

2. Calculate your costs

After accounting for all your revenues, group your expenses into one of three categories: 

• Cost of goods sold (COGS)
• Operating expenses
• Non-operating expenses

COGS are all the costs of making a product. For a service business that doesn’t make a physical product, COGS can include labor for employees performing the service. For example, a hair stylist’s COGS would include the time spent styling hair.

You'll group all the other business costs as operating expenses. Non-operating expenses should be everything that's left. This will be the money you spend on things like taxes and interest.

For example, a hairstylist would have operating expenses like cosmetic supplies, insurance, and marketing. Non-operating expenses may include interest on business debt or writing off unsellable inventory.

3. Figure out your net income

This is the last step. It's subtracting all the expenses from your revenue. The net income will either be a profit or a loss—or, in very rare cases, zero. Your net income gives you a stronger picture of your business’s financial standing. 

Keep in mind that your profit and loss statement only gives you insight into the income you’re earning after accounting for expenses. You’ll also want to refer to your balance sheet that accounts for your liabilities to gain a full picture of how your business is doing.

How to read a P&L statement

Once you’ve put together your profit and loss statement, it’s useful to analyze it. It’ll show whether you’re profitable or not. But it also allows you to identify areas to save or reduce spending.

Determine profitability

Profitability measures how much a business earns compared to its expenses. There are different ways to measure profitability. Two common measures of profitability are gross profit margin and net profit margin.

Say a window maker’s revenue was $500,000 last year. They spent $300,000 on COGS to make the windows. Net income for the year was $40,000.

The company's gross profit margin is 40% or ($500,000 - $300,000) / $500,000.

Its net profit margin is 8% or $40,000 / $500,000.

Many small businesses aim for a net profit margin of 10%, although this will depend on your industry.

Assess financial ratios

Beyond profitability, the P&L can also help you calculate other ratios with help from the balance sheet. These are the ratios you’ll want to look at:

• Efficiency ratios: These assess how well a company uses its resources.
• Accounts receivable turnover ratios: These show how well your business manages the money customers owe you for products or services you’ve provided.
• Inventory turnover ratios: These tell you how well your company manages its inventory. You can also use an inventory turnover calculator to help you see how your business is doing. 

Comparing P&L statements 

P&L statements are most useful when comparing them to previous periods because they allow you to track progress over time. They’re also useful when it comes to setting goals for your business.

Single-step vs. multi-step P&L: Which accounting method is right for you? 

There are two ways to set up your P&L statement: the single-step and multi-step methods. Both work differently and offer different benefits, so let’s take a closer look at them in practice. 

The single-step method

The single-step method of putting together a P&L statement is simple and straightforward. It involves only one calculation: subtracting all expenses from revenues to get net income. This method doesn't separate revenues and expenses into different categories.

The disadvantage of the single-step method is that it doesn't provide as much detail. This makes it difficult for businesses to analyze their profitability. However, the single-step method is quick and easy to calculate. It works for businesses that don’t have many expenses.

The multi-step method

The multi-step method involves more calculations and the classification of expenses. But it makes assessing your company's profitability easier. It groups the cost to make products or services as costs of goods sold (COGS). The remaining expenses are either operating or non-operating. 

Here’s a simple profit and loss statement using the multi-step method, which is what many businesses use: 

An example of the P&L in practice

As any small business owner already knows, understanding a concept in theory is very different from putting it into practice. So, what is a profit and loss statement example you can follow and implement?

To give a clear idea of the process of creating a P&L statement in action, we’ll follow the hypothetical company Wholesome Bean Coffee Co., addressing each step in turn and highlighting how each line item affects their bottom line. 

1. Calculate net revenue

In March 2026, Wholesome Bean Coffee Co. brought in $25,000 in total sales. The total, or “gross,” amount reflects the at-face value of all sales made. It is not the same as the amount of money the company actually retained, known as “net” sales.

To calculate net sales, Wholesome Bean Coffee Co. must do two things: subtract returns and adjust for discounts. Returns negate the original sale, and sales with discounts have a lower profit margin than full-price items, so they require a higher sales volume to maintain profitability. 

If a $5 cup of joe were discounted to $3, the $2 difference would be unrealized and treated as a loss.

The business owner must subtract both returns and discounts from the gross sales to calculate net sales.

If Wholesome Bean Coffee Co. had returns and discounts that totaled $500, its net sales would be $24,500. This true picture of revenue is essential for accurately calculating margins. 

Formula:

Gross Revenue - Returns and Discounts = Net Revenue

$25,000 - $500 = $24,500

2. Understand gross profit

With net revenue calculated, the next thing Wholesome Bean Coffee Co. needs to do is figure out what amount of that cash flow is profit. As with gross revenue and net revenue, there is also gross profit and net profit. 

The gross profit is found by subtracting the direct costs (in this case, things like the price of beans, milk, and the baristas’ hourly wages) from the net revenue. 

Let’s say that Wholesome Bean Coffee Co. had direct costs of $10,000:

Formula:

Net Revenue - Direct Costs = Gross Profit

$24,500 - $10,000 = $14,500

Now, Wholesome Bean Coffee Co. wants to use its gross profit to calculate its gross profit margin: what percentage of each sale, on average, contributes to income.

Formula:

(Gross Profit ÷ Net Revenue) × 100% = Gross Margin

($14,500 ÷ $24,500) × 100% = 59.18%

This means that about 59% of every sale goes toward income, and the other 41% toward expenses. So, for a single $5 cup of cold brew, for example, $2.95 of the $5 would go toward income, and $2.05 would be used to pay expenses.

Gross margins can be thought of as Wholesome Bean Coffee Co.’s “efficiency score” for their core product: how effectively they are turning revenue into profit. The higher the gross margin, the higher the efficiency, and the higher the profit.

Generally speaking, gross margins between 50% and 70% are ideal and achievable. 

3. Manage operating expenses

Now that the gross margin calculation is complete, Wholesome Bean Coffee Co. needs to return to the gross profit calculation ($14,500) to figure out its operating income. 

Operating income is the amount left over after fixed and variable costs, such as rent, marketing expenses, and insurance fees, are deducted from gross profit.

Let’s say that Wholesome Bean Coffee Co. pays $3,000 in rent each month, spends $1,000 toward marketing, and pays $4,000 for insurance.

First, Wholesome Bean Coffee Co. will add its individual fixed costs together to find its total fixed cost.

Formula:

Fixed Cost A + Fixed Cost B + Fixed Cost C… ect. = Total Fixed Cost

$3,000 + $1,000 + $4,000 = $8,000

Then they will subtract total fixed costs from gross profit to find operating income.

Formula:

Gross Profit - Total Fixed Costs = Operating Income

$14,500 - $8,000 = $6,500

This number shows the owner whether their business is sustainable, excluding large, one-off expenditures such as taxes or loan repayments.

4. Arrive at net income

Finally, Wholesome Bean Coffee Co. is ready for the moment of truth: calculating net income. To find the actual take-home pay the owner received in March 2026, the last thing that needs to be deducted are the non-operating expenses. 

As with fixed costs, Wholesome Bean Coffee Co. will add together its other monthly expenses. For example, $300 in interest on an equipment loan and $1,200 in estimated taxes.

Formula:

Expense A + Expense B… ect. = Total Non-Operating Expenses

$300 + $1,200 = $1,500

This total is then subtracted from the operating income to reveal Wholesome Bean Coffee Co.’s net income for the month.

Formula:

Operating Income - Total Non-Operating Expenses = Net Income

$6,500 - $1,500 = $5,000

This $5,000 in net income is how much the owner of Wholesome Bean Coffee Co. made in March. In effect, it is the amount of money they can pay themselves and take home that month, or reinvest in their business. If the owner can live comfortably on that amount while meeting their growth targets, the business is in good shape.

While it’s important to know the reasoning and steps behind creating a P&L statement and calculating net income, doing so manually creates an unnecessary inefficiency. Manual tracking of revenue and income calculations are significant time sinks, prone to human error, and can realistically be performed only at relatively infrequent intervals.

Instead, small business owners are turning to AI-powered accounting software like QuickBooks Online to automate the entire workflow. In the case of Wholesome Bean Coffee Co., the owner would be able to track margins and net income in real time as the software updates the books instantly whenever a latte is sold, or a rent check clears. 

As a small business owner, you need to be aware of your company’s financial health. One of the best ways to do this is to analyze your profit and loss statement and assess key financial KPIs. Use the free profit and loss statement template to learn more about your company’s financial situation.

Regularly reviewing your P&L will give you a better idea of how your business is doing. Accounting software like QuickBooks Online makes creating your P&L and other financial statements easy, as well as assessing your spending.

Spend more time growing your business

As a small business owner, you need to be aware of your company’s financial health. One of the best ways to do this is to analyze your profit and loss statement and assess key financial KPIs. Use the free profit and loss statement template to learn more about your company’s financial situation.

Regularly reviewing your P&L will give you a better idea of how your business is doing. Accounting software like QuickBooks Online makes creating your P&L and other financial statements easy, as well as assessing your spending.