Profit and loss statement (P&L)

The profit and loss statement, also known as an income statement, is part of the balance sheet and helps determine equity. As such, the P&L account appears on the li­a­bil­i­ties side of the balance sheet. It not only provides you with an overview of your finances but is also crucial for investors and auditors, as it makes your company’s profit or loss trans­par­ent.

What is a profit & loss statement?

The P&L sum­ma­rizes a company’s revenues, expenses, and profits (or losses) over a specific period, such as a month, quarter, or year. It includes key com­po­nents like revenue (sales), cost of goods sold (COGS), gross profit, operating expenses, operating profit (EBIT), and net profit or loss. The P&L is essential for tracking prof­itabil­i­ty, making informed business decisions, at­tract­ing investors, ensuring com­pli­ance with auditors, and cal­cu­lat­ing taxable income. As one of the three main financial state­ments—alongside the balance sheet and cash flow statement—it provides a clear picture of a company’s financial health.

Who needs to prepare a P&L statement?

In the U.S., busi­ness­es are generally required to track their income and expenses to determine taxable profits or losses. The Internal Revenue Service (IRS) mandates that all busi­ness­es report their earnings for tax purposes, with specific re­quire­ments varying based on business structure. Cor­po­ra­tions, part­ner­ships, and busi­ness­es using accrual ac­count­ing must prepare a profit and loss statement as part of their financial reporting.

U.S. companies typically follow Generally Accepted Ac­count­ing Prin­ci­ples (GAAP), while multi­na­tion­al companies may also comply with In­ter­na­tion­al Financial Reporting Standards (IFRS). Busi­ness­es using double-entry book­keep­ing must generate a P&L statement as part of their financial records.

The P&L statement is a core part of the annual financial state­ments and must be prepared for each fiscal year. However, many busi­ness­es create P&L reports more fre­quent­ly—often quarterly or monthly—to monitor financial per­for­mance and respond proac­tive­ly to negative trends. Ad­di­tion­al­ly, publicly traded companies and larger cor­po­ra­tions are subject to financial dis­clo­sure re­quire­ments under the Se­cu­ri­ties and Exchange Com­mis­sion (SEC) reg­u­la­tions, meaning they must publish both a P&L statement and a full financial report annually.

The format of a P&L statement

There is no strict legal format for a profit and loss statement in the U.S., but busi­ness­es should follow Generally Accepted Ac­count­ing Prin­ci­ples (GAAP) for accuracy and trans­paren­cy. The key re­quire­ment is that the statement is clear, well-struc­tured, and complete.

For publicly traded companies, financial reporting reg­u­la­tions set by the Se­cu­ri­ties and Exchange Com­mis­sion (SEC) require a stan­dard­ized format, typically following the multi-step income statement format. Busi­ness­es are generally not allowed to offset (net) revenues and expenses unless specif­i­cal­ly permitted under GAAP. The purpose of a P&L is to provide full trans­paren­cy by listing all revenues and expenses sep­a­rate­ly.

Account Format (T-Account)

The account format, also known as the T-account format, uses two columns: debit and credit. On the left side (debit), all expenses are recorded, while the right side (credit) lists revenues.

This format has the advantage of clearly dis­play­ing the re­la­tion­ship between revenues and expenses in a two-column layout, making it easier to compare totals than in a multi-step income statement. Ad­di­tion­al­ly, the account format ex­plic­it­ly shows the total revenue and total expenses, allowing for a quick as­sess­ment of overall financial per­for­mance. Please not that the T-Account format is used for internal book­keep­ing, not for formal financial reporting.

Profit and loss account

Multi-Step Income Statement

The multi-step income statement cat­e­go­rizes financial items into groups with subtotals, making it easier to analyze different com­po­nents of a company’s financial per­for­mance. Each section rep­re­sents a distinct stage in profit cal­cu­la­tion, providing a clearer breakdown of revenues, expenses, and prof­itabil­i­ty trends.

This format improves trans­paren­cy by sep­a­rat­ing operating income, non-operating income, and net income, allowing for better tracking of how profit or loss evolves at each step. The multi-step income statement is preferred for GAAP-compliant financial reporting.

How to create a P&L statement

Busi­ness­es use accrual ac­count­ing for financial reporting, but cash ac­count­ing is an option for small busi­ness­es. We take a look at both options in more detail below.

Cash Ac­count­ing Method

Under the cash ac­count­ing method, revenues and expenses are recorded when cash is received or paid, not when the trans­ac­tion occurs. This method is simpler and typically used by small busi­ness­es with revenues under $25 million (IRS threshold for cash ac­count­ing el­i­gi­bil­i­ty), as well as sole pro­pri­etors, free­lancers, and small service providers.

Example:

• A business sells a product in December, but the customer pays in January.
• Under cash ac­count­ing, the revenue is recorded in January, when the cash is received.

Accrual Ac­count­ing Method (GAAP Standard)

Under accrual ac­count­ing, revenues and expenses are recorded when earned or incurred, re­gard­less of when cash is received or paid. This method is required under GAAP and is used by medium to large busi­ness­es and publicly traded companies.

Example:

• A business sells a product in December, and the customer pays in January.
• Under accrual ac­count­ing, the revenue is recorded in December, when the sale occurred.

How cash vs. accrual affects the P&L statement

Below is a com­par­i­son of how the same trans­ac­tion appears in a P&L statement under cash and accrual ac­count­ing:

Example trans­ac­tion:

A company sells a product in December 2024, but the customer pays in January 2025.

This is what the Cash Ac­count­ing P&L (2024) would look like:

Revenue

• No revenue recorded (payment received in 2025)

---

Total Revenue: $0

Expenses

• $2,000 Cost of Goods Sold (paid in December)

---

Net Loss: ($2,000)

This is what the Accrual Ac­count­ing P&L (2024) would look like:

Revenue

• $5,000 Sales Revenue (recorded when sale occurs in December)

---

Total Revenue: $5,000

Expenses

• $2,000 Cost of Goods Sold (matched to sale in December)

---

Net Profit: $3,000

The main dif­fer­ences are that under cash ac­count­ing, revenue is not recorded until the payment is received in 2025, leading to a loss in 2024. Under accrual ac­count­ing, revenue is matched to the sale date in 2024, leading to a profit in 2024.

How to create a profit and loss statement step by step

A profit & loss statement provides an overview of a company’s financial per­for­mance by sum­ma­riz­ing revenue, expenses, and profit over a specific period. Follow these nine steps to create an accurate P&L statement:

Step 1: Select a reporting period

Determine the timeframe for your P&L statement. Most busi­ness­es prepare P&L state­ments monthly, quarterly, or annually for financial tracking and tax reporting.

Step 2: Record business revenue

Track all income sources, including sales, service fees, and other earnings. Cat­e­go­rize them clearly to maintain an organized financial record.

At the end of the reporting period, the sum of all revenue sources rep­re­sents total operating revenue.

Step 3: Calculate the Cost of Goods Sold (COGS)

COGS includes direct costs related to producing goods or services, such as raw materials and direct labor, but does not include operating expenses like rent or marketing.

COGS = Beginning Inventory + Purchases - Ending Inventory

Step 4: Determine gross profit

Gross profit rep­re­sents revenue after deducting the direct costs of pro­duc­tion.

Gross Profit = Total Revenue - COGS

Step 5: Identify operating expenses

Operating expenses (OpEx) cover business costs not directly tied to pro­duc­tion, such as:

• Rent and utilities
• Salaries and wages
• Marketing and ad­ver­tis­ing
• Insurance and legal fees

Step 6: Account for de­pre­ci­a­tion and amor­ti­za­tion

De­pre­ci­a­tion applies to physical assets (e.g., machinery, office equipment), while amor­ti­za­tion applies to in­tan­gi­ble assets (e.g., patents, trade­marks). It is is recorded as a non-cash expense to reduce taxable income.

(Asset Cost - Salvage Value) ÷ Useful Life

Step 7: Calculate operating profit (EBIT)

Operating profit, or Earnings Before Interest and Taxes (EBIT), reflects profit after deducting operating expenses, de­pre­ci­a­tion, and amor­ti­za­tion.

Operating Profit = Gross Profit - Operating Expenses - De­pre­ci­a­tion & Amor­ti­za­tion

Step 8: Determine interest and taxes

• Interest expense – Includes interest from loans, credit cards, or business credit lines.
• Income taxes – P&L state­ments help determine the effective tax rate, cal­cu­lat­ed as:

Effective Tax Rate = Tax Expense ÷ Earnings Before Taxes (EBT)

Step 9: Calculate net profit (or net loss)

Net profit (or net loss) is the final amount left after deducting all expenses, including interest and taxes, from operating profit.

Net Profit = Operating Profit - Interest - Taxes

Please note the legal dis­claimer for this article.