A profit and loss statement is one of the most important reports you will produce for your small business. It summarises all the income and expenses over a set time. It shows how much the business can generate in revenue, what it has spent, and whether the result is a profit or a loss.
If you run a limited company, you are required to submit a Profit and Loss Statement to Companies House each year. If you are self-employed or a sole trader, you need the figures to complete your Self Assessment tax return.
This guide explains what goes into a profit and loss statement, how to read one, and how to put one together, including a free Excel template you can download and use straight away.
Profit and Loss Statement At a Glance
- Also called an income statement or P&L
- Shows total sales and total expenses over a set time
- Required annually for limited companies
- Sole traders need the figures for Self Assessment
- Basic formula: sales minus expenses equals profit
- Prepare using software, Excel, or our free template
A profit and loss statement summarises all the income and expenses over a specific period, such as a month, quarter, or year. The final line tells you whether the business has made money.
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It is also known as an income statement, a P&L account, or a statement of financial performance. These all refer to the same report.
You might produce one monthly to keep a close eye on how things are going, quarterly to support decision-making, or annually for your accounts and tax return.
Who needs a Profit and Loss Statement?
Limited companies are legally required to produce a profit and loss statement for Companies House each year.
Sole traders, landlords and the self-employed are not required to submit a formal P&L to HMRC, but they do need the income and expense totals to complete their Self Assessment return and work out tax liability.
Partnerships use the statement to work out each partner’s share of the profit.
The Other Financial Statements
The P&L statement is one of three main financial reports. Each one tells you something different about your business.
The Balance Sheet shows the company’s financial health at a single point in time, what the business owns (assets), what it owes (liabilities), and what is left over for the owner (equity). Where the P&L statement covers a period of time, the balance sheet is a snapshot of a single day, usually the last day of your financial year.
The Cash Flow Forecast projects what cash is expected to come in and go out over the coming months. It is possible to show a healthy revenue on your P&L and still run out of cash, for example, if customers are slow to pay while your own bills fall due. The cash flow forecast helps you see that problem coming in time to do something about it.
Together, these three reports give you a complete picture of your finances: the total amount you have earned, what you own and owe, and whether you will have enough cash to keep going.
The Profit and Loss Statement Basic Formula
Every profit and loss statement is built on the same simple idea:
Sales – Expenses = Total Profit (or Loss)
Profit and Loss Statement Terms Explained
Before working through an example, it helps to understand the main terms you will come across.
Sales (or Turnover) is the total amount of sales during the period covered. If you offer multiple revenue streams, they may be listed separately before the total is shown.
Cost of Goods Sold or Cost of Sales COS is the cost of producing whatever you sold. For a product business, this means the cost of buying or making the goods. For a service business, it might include direct labour. It only covers what is directly tied to sales, not general running expenses. For example, if you bought £5,000 of stock in a month but only used £3,000 of it to fulfil sales, the COS is £3,000 — not £5,000.
Gross Profit is what is left after deducting the cost of goods sold from total income.
Gross Profit = Sales – Cost of Sales
Operating Expenses (or Overheads or operating costs) are the general expenses that are not directly tied to a specific sale. These include:
- Wages and salaries
- Rent and rates
- Utilities
- Insurance
- Marketing and advertising
- Telephone and broadband
- Accountancy and professional fees
- Stationery and office supplies
- Depreciation of fixed assets
- Bank charges
Operating Profit is gross profit minus overheads. It shows how profitable the core operations are before interest and tax.
Net Profit or net Income is the final bottom line, what the business has actually earned after all expenses, including interest and tax, have been deducted.
Net Profit = Gross Profit – operating expenses – Interest – Tax
How to Read a Profit and Loss Statement
Reading a profit and Loss statement is easier than it looks. It runs from top to bottom. You start with sales, then work down through the expenses until you reach the final profit or loss.
Step 1 – Start with sales. How much did the business take in? If you offer more than one product or service, are some doing better than others?
Step 2 – Check your gross profit. This is what is left after the direct costs of making or delivering what you sell.
Step 3 – Go through your overheads. Look at each line and ask whether the amount is justified.
Step 4 — Look at the bottom line. Is the business making a net profit? Is it more or less than last month or last year?
Step 5 — Compare with a previous period. A single profit and loss statement tells you where you are. Comparing two or three side by side tells you where you are heading.
Gross Profit vs Net Profit
This is one of the most common points of confusion.
Gross profit is what is left after deducting the cost of goods sold from your sales. It does not include the general expenses of running the business.
Net profit is what remains after accounting for overheads, interest, and tax. It is the true measure of how much the business has earned.
Gross profit margin shows gross profit as a percentage of sales:
Gross Profit Margin = (Gross Profit ÷ Sales) × 100
Net profit margin shows net profit as a percentage of sales:
Net Profit Margin = (Net Profit ÷ Sales) × 100
Use our net profit margin calculator to work out your own figures.
Cash Basis vs Accruals
There are two methods that affect how figures are recorded.
Accruals records revenue when it is earned and expenses when they are incurred, regardless of when cash moves. This gives a more accurate picture of how the business is performing in a given time.
Cash basis records revenue and expenses only when cash actually moves, when you receive payment or make one. It is simpler to maintain and is available to sole traders and the self-employed. It is not available to Limited Companies.
Example Accounting Profit and Loss Statement
Below is a Profit and Loss account example in the UK for a year.
Profit and Loss Calculation
Using the above P&L example, we can make the following calculations:
- Turnover or total revenue – the total of hardware and consultancy of 120,000
- Cost of Goods Sold – includes hardware and direct labour of 60,000
- Gross Profit – Sales 100,000 less cost goods sold 60,000, giving a total of 60,000
- Overheads of 42,800 are deducted to leave a profit of 17,200
Using Accounting Software
Bookkeeping software like Sage UK, Xero or QuickBooks, generates your profit and loss statement automatically as you record your sales and expenses. There is no need to prepare it manually; the report is built from your bookkeeping records and can be run for any date range.
Recording as you go means the figures are always up to date, your accountant has everything they need at year’s end, and there are no last-minute scrambles to find missing receipts.
Profit and Loss Template UK
We have a free Excel profit and Loss statement template suitable for sole traders, landlords, charities and personal use. It covers a full year with monthly columns and includes five income categories and fifteen expense categories, which you can rename to suit your own setup.
The Profit and Loss statement template is easy to set up and use and full instructions are on the download page.
Profit and Loss Statement FAQ
Do all businesses need a Profit and Loss Statement?
Limited companies must produce one for Companies House each year. Sole traders and the self-employed need the income and expense totals for their Self Assessment return, but do not have to submit a formal statement to HMRC.
What is the difference between a P&L and a Balance Sheet?
The P&L covers income and spending over time and shows whether you made a profit or a loss. The balance sheet shows the financial position at a single point in time, what the business owns, what it owes, and the owner’s equity.
What is the difference between gross profit and net profit?
Gross profit is sales minus the direct cost of goods or services. Net profit is what remains after all costs, including overheads, interest, and tax, have been deducted. A business can have a strong gross profit and still make a net loss if its overheads are too high.
How often should I produce a Profit and Loss Statement?
At a minimum, once a year for your accounts and tax return. Most owners benefit from doing this monthly or quarterly to spot trends and make decisions before problems get bigger.
Profit and Loss Conclusion
A profit and loss statement shows whether your business has made a profit or a loss over a given time. It is a legal requirement for limited companies and provides the figures sole traders need for their Self Assessment tax return. Reviewing it regularly helps you understand your income, monitor spending, and make better decisions about where the business is headed.
Related Pages
Balance Sheet: Guide and free template
Cash Flow Forecast: Guide and free template
Best Accounting Software for Small Businesses
Last updated: June 2026
