Profit & Loss

A profit and loss statement (P&L), or an income statement, is a financial document that provides a snapshot of your company’s financial performance over a specific period. After all deductions, this statement details your business’s revenue, expenses, and net income. Regularly reviewing your profit and loss statement can gain valuable insights into your business’s financial performance, allowing you to make strategic decisions to help grow your business.

What’s in a profit and loss statement

• Revenue: Includes all income from sales, services, and other business activities
• Cost of goods sold (COGS): The direct costs attributed to the production of goods sold by your company
• Gross profit: Calculated as total revenue minus the cost of goods sold
• Operating expenses: Expenses incurred during regular business operations, including rent, salaries, marketing, and more
• Net income: The final profit after all expenses, including taxes and interest, are deducted from gross profit

Why it matters

Reviewing the P&L regularly, such as monthly or quarterly, helps business owners make informed decisions about pricing, staffing, and spending. It also reveals trends that a bank balance alone can’t show.

Lenders and investors may ask for P&L statements when evaluating loan applications or investment opportunities. For tax purposes, accurate income and expense records can help sole proprietors, LLCs, partnerships, and corporations prepare the correct tax forms and support reported amounts.

Common uses

• Tax preparation: Sole proprietors use the annual P&L to complete Schedule C, reporting business income and deductible expenses.
• Loan applications: Lenders may review current and prior P&L statements to evaluate revenue, expenses, profitability, and repayment ability.
• Business valuation: Buyers and advisors may analyze P&L history to understand earnings trends and project future performance.
• Operational decisions: A business owner may review monthly P&Ls to identify rising costs, shrinking margins, seasonal changes, or underperforming products or services.

Key limitations

The P&L is a performance document, not a cash flow document. A business can show a net profit while still experiencing cash shortfalls if customers have not paid outstanding invoices. This distinction matters when managing day-to-day liquidity, and it is why the P&L should accompany the cash flow statement and balance sheet.

Profit and loss in the context of business structure

A P&L statement shows the business’s profit or loss for a period. It does not, by itself, determine how owners share that profit or loss. In a partnership or multi-member LLC taxed as a partnership, the partnership agreement or operating agreement may explain how income, losses, deductions, and credits are allocated among owners, subject to tax rules.

For pass-through entities, such as partnerships and S corporations, income and losses generally pass through to owners’ personal tax returns. Accurate P&L records can help support the amounts reported on tax filings and owner schedules.

Related terms

These related terms can help explain how P&L statements connect to revenue, costs, profitability, and cash flow.

• Income statement: Another name for a profit and loss statement
• Profit allocation: The division of net profits among LLC members or partners.
• Loss allocation: The distribution of net losses among business owners.
• Withdrawal in business: An owner's withdrawal of funds from the business, which is separate from the profit reported on the P&L statement.

FAQs about profit & loss statement

What is the difference between a P&L and a cash flow statement?

A P&L reports a business’s revenues and expenses for a specific period, while a cash flow statement tracks the movement of cash into and out of the business.

What is the difference between gross profit and net income?

Gross profit is revenue minus direct production costs: it measures efficiency before overhead. Net income is what remains after the business deducts operating expenses, interest, and taxes, making it the true measure of what the business earned.

Does a single-member LLC need a P&L statement?

Yes. A single-member LLC typically gets taxed as a sole proprietorship, and the P&L is the source document for Schedule C. It's also required if the owner applies for a business loan, seeks outside investment, or plans to sell the business.