Profit and Loss Report: A Beginner’s Guide (2024)

6 Min. Read

April 13, 2023

Profit and Loss Report: A Beginner’s Guide (1)

The profit and loss (P&L) report is a financial statement that summarizes the total income and total expenses of a business in a specific period of time. It is also known as the income statement or the statement of operations.

The goal of a P&L report is to measure a company’s profits by subtracting expenses from income and provide an overview of the financial health of the business.

Here’s what we’ll cover:

What Is a Profit and Loss Report?
What Does the Profit and Loss Statement Show?
Key Components of a Profit and Loss Report
Example of a Profit and Loss Report
How Do I Write a Profit and Loss Statement?
What Can I Learn From My Profit and Loss Statement?

Note: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice, please contact an accountant in your area.

What Is a Profit and Loss Report?

The profit and loss statements contain summarized information about revenue and expenses. These statements are generated on a weekly, monthly, quarterly or annual basis, depending on the standard operating procedure of a business.

The basic formula of a P&L report is:

Profit and Loss Report: A Beginner’s Guide (3)

What Does the Profit and Loss Statement Show?

The profit and loss report is an important financial statement used by business owners and accountants. The report shows information about the net profit or loss based on your revenues and expenses. It details the ability of a business to manage its profits by cutting costs and driving revenue.

The P&L report also allows you to investigate revenue and expense trends, net income, and overall profitability to then allocate resources and budgets accordingly.

Another reason to generate a profit and loss report is that it’s useful for filing a tax return with the IRS to assess taxes on the business profits.

Key Components of a Profit and Loss Report

A profit and loss report will look a bit different from business to business, depending on your business type and its complexity. For example, if you sell products versus services, have multiple types of income, or have lots of expenses. But here are some typical income statement components.

1. Revenues

This entry represents the net sales or receipts during the accounting period. It includes the revenue earned from the primary business activity of the entity along with the non-operating revenue.

2. Cost of Goods Sold

Cost of goods sold, or COGS, are the direct expenses incurred to produce products or deliver services to customers, including direct labor and materials.

3. Gross Profit

Also known as gross income or gross margin, the gross profit is net revenue minus the cost of goods sold.

4. Operating Expenses

Operating expenses are administrative, general, and selling expenses that are related to running the business for a specific period of time. This includes rental expenses, payroll, utilities, office supplies, and any indirect costs required to operate the business. Also included are non-cash expenses such as depreciation.

5. Operating Income

Operating income refers to earnings before taxes, depreciation, interest, and authorization. Deduct operating expenses from your gross profit to calculate operating income.

6. Other Income and Expenses

While not required, many businesses break out certain revenues and expenses into a separate section of the P&L. This section usually includes income and expenses that aren’t related to normal operations, such as gains or losses from the sale of the company’s assets, interest and dividend income from investments and other revenues and expenses that are either unusual or infrequent.

7. Net Profit

Net profit is the total amount earned after deducting all expenses. To calculate net profit, subtract the total expenses from your gross profit.

Example of a Profit and Loss Report

A P&L starts with a header that contains the name of your business and the accounting period.

This is followed by:

How Do I Write a Profit and Loss Statement?

There are two basic methods of creating a profit and loss report manually.

Single-Step Method

Primarily used by service-based industries and small businesses, the single-step method determines net income by subtracting expenses and losses from revenues and gains.

It uses a single subtotal for all revenue line items and a single subtotal for all expense items. The net gain or loss appears at the bottom of the report and is what’s known as the “bottom line” in accounting.

The formula to calculate profit with the single-step method is:

Profit and Loss Report: A Beginner’s Guide (5)

A single-step statement does not provide a breakdown of expenses by department or gross margin calculations.

Multiple-Step Method

An alternative to the single-step method, the multi-step profit and loss statement separates the operating revenue and operating expenses from other revenue and expenses. This is done to calculate net operating income.

This method is better suited for larger businesses that want to understand the profitability of their core operations.

The 3 steps of the multi-step method are:

Step 1: Calculate Gross Profit

Profit and Loss Report: A Beginner’s Guide (6)

Step 2: Calculate Operating Income

Profit and Loss Report: A Beginner’s Guide (7)

Step 3: Calculate Net Income

Profit and Loss Report: A Beginner’s Guide (8)

Note that income taxes paid may be listed with expenses or subtracted at the end of your statement, just above the bottom line.

Instead of manually creating a P&L report, you can use accounting software to streamline the process. The detailed breakdown of profits and losses in the financial reports will give you the full picture when it comes to the health of your business.

What Can I Learn From My Profit and Loss Statement?

Many small businesses prepare financial statements because they’re required by a bank or necessary for filing tax returns. But the profit and loss statement can also be a useful tool for monitoring your company’s financial health.

Here are 3 key insights you can gather from the information in your profit and loss report.

Where Your Profits Are Coming From

If you sell multiple products or services, you can break them down across multiple product or service lines on your P&L. This can tell you whether certain products or services are more profitable than others and if some are growing while others are shrinking.

Whether You’re Managing Costs Efficiently

Looking at a comparative profit and loss statement that compares your current numbers to those of a prior period can show you whether certain expenses are growing faster than expected. For example, if revenues increase by 20% from the prior year, but office supplies expenses are up 75%, you want to figure out why.

Whether Your Business Operations Are Profitable

Your business may have plenty of cash in the bank from loans and investors, but are you turning a profit? The bottom line of your profit and loss statement will tell you whether your company’s financial performance is positive or negative.

While a P&L statement is useful on its own, analyzing it along with the other primary financial statements—your balance sheet and cash flow statement—can provide more insight into your company’s financial position.

Janet Berry-Johnson

About the author

Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics. Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others. You can learn more about her work at jberryjohnson.com.

Profit and Loss (P&L) Report Overview:

The Profit and Loss (P&L) report, also known as the income statement or statement of operations, is a crucial financial statement summarizing a business's total income and expenses within a specific timeframe. The primary aim is to gauge a company's profitability by subtracting expenses from income, offering a snapshot of its financial health.

Frequency and Generation of P&L Reports:

P&L reports are typically generated weekly, monthly, quarterly, or annually, depending on a business's standard operating procedures. The statements contain summarized information about revenue and expenses, forming the foundation for financial analysis.

Basic Formula of a P&L Report:

The fundamental formula of a P&L report is:

[ \text{Net Profit (or Loss)} = \text{Total Income} - \text{Total Expenses} ]

Purpose and Importance of P&L Reports:

The P&L report serves various purposes, including:

Financial Health Overview: It provides insights into a business's ability to manage profits, cut costs, and drive revenue.
Trend Analysis: Enables investigation of revenue and expense trends, net income, and overall profitability.
Resource Allocation: Assists in allocating resources and budgets based on financial performance.
Tax Reporting: Useful for filing tax returns with the IRS to assess taxes on business profits.

Key Components of a P&L Report:

Revenues: Net sales or receipts from primary business activities and non-operating revenue.
Cost of Goods Sold (COGS): Direct expenses to produce products or deliver services.
Gross Profit: Net revenue minus COGS.
Operating Expenses: Administrative, general, and selling expenses related to running the business.
Operating Income: Earnings before taxes, depreciation, interest, and authorization.
Other Income and Expenses: Additional section for non-operating revenues and expenses.
Net Profit: Total amount earned after deducting all expenses.

Writing a Profit and Loss Statement:

Two Methods:

Single-Step Method:
- Used by service-based industries and small businesses.
- Determines net income by subtracting all expenses and losses from revenues and gains.
Multiple-Step Method:
- Separates operating revenue and operating expenses from other revenues and expenses.
- More suitable for larger businesses seeking to understand core operational profitability.

Analysis of P&L Statement:

The P&L statement provides valuable insights, including:

Revenue Breakdown: Helps identify profitable products or services.
Cost Management: Indicates whether expenses are growing efficiently.
Profitability of Operations: Reveals whether the business is turning a profit.

Integration with Other Financial Statements:

Analyzing the P&L statement alongside other financial statements like the balance sheet and cash flow statement provides a comprehensive view of a company's financial position.

In conclusion, while a P&L statement is crucial for tax reporting and regulatory compliance, it also serves as a powerful tool for internal analysis and decision-making, aiding businesses in understanding and improving their financial performance.