What Is a Profit and Loss Account?
The P&L shows whether your business made money in a period. Learn to read it properly.
Key Takeaways
- The P&L shows revenue, costs, and profit over a specific period
- Gross profit = revenue minus cost of goods sold
- Operating profit = gross profit minus operating expenses
- Net profit is the bottom line after all costs including tax and interest
What the P&L shows
The Profit and Loss account shows how much money your business made and spent during a specific period. Unlike a balance sheet (a snapshot), the P&L is a film — it shows activity over time. It is the first financial statement founders reach for when asking how the business is performing.
Revenue
The P&L starts with revenue — the total value of goods sold or services delivered. Note that revenue is not the same as cash received — if you invoiced in December but the customer pays in January, December's P&L includes that invoice as revenue even though the cash has not arrived. This is accruals-basis accounting.
Gross profit
Gross profit is revenue minus the direct costs of producing what you sold — Cost of Goods Sold (COGS). For a product business, COGS includes materials, manufacturing, and freight. Gross profit margin tells you how efficiently you convert sales into value before overhead costs.
Operating expenses and operating profit
Below gross profit come operating expenses — the overheads that run the business: rent, salaries, marketing, software. Subtracting these from gross profit gives operating profit (EBIT). This measures how profitable your core operations are, before the effects of how you have chosen to finance the business.
Net profit
From operating profit, subtract interest on loans and add interest received, then subtract corporation tax. What remains is net profit — the bottom line. A positive and growing net profit margin is one of the most reliable indicators of a sustainable business.