What a profit and loss statement shows and why you need one
A profit and loss statement (also called a P&L or income statement) is a record of your business's money coming in and money going out over a set period—usually a month, quarter, or year. It shows whether you made money, lost money, or broke even. The statement starts with revenue (what customers paid you), subtracts all your expenses (what you spent to run the business), and ends with your net profit or loss.
You need a P&L statement for three practical reasons: to know if your business is actually profitable, to spot where money is leaking (which expenses are too high), and to show lenders or investors what your financial picture looks like. Banks want to see a P&L before they lend you money. The IRS expects one when you file taxes. And you need one to make real decisions about pricing, hiring, or cutting costs.
The statement covers a specific time window—it is not a snapshot of one moment like a balance sheet is. It is a movie of the money that moved during that period.
Key Takeaways
- A profit and loss statement lists all revenue, subtracts all expenses, and shows your net profit or loss for a specific period.
- You need three sections: revenue at the top, operating expenses in the middle, and net profit or loss at the bottom.
- Revenue includes all money from sales; expenses include rent, payroll, supplies, utilities, and anything else you paid to run the business.
- You can build a P&L in a spreadsheet using your bank statements and receipts, or use accounting software that pulls data automatically.
- Most small businesses create a P&L monthly to catch problems early, and annually for tax filing and lending decisions.
The three sections of a profit and loss statement
Every P&L has the same basic structure. Start with revenue at the top—this is all the money that came into your business from sales, services, or other sources. If you sold $50,000 worth of products in January, that is your revenue for January.
The second section is operating expenses—everything you spent to keep the business running. This includes rent, utilities, payroll, insurance, office supplies, equipment, marketing, vehicle costs, and professional fees. List each category separately so you can see where the money actually went. If you spent $8,000 on rent, $12,000 on payroll, and $2,000 on supplies in January, write each one down.
The third section is net profit or loss. Subtract total expenses from total revenue. If revenue was $50,000 and expenses were $40,000, your net profit is $10,000. If expenses were $55,000, your net loss is $5,000. That bottom number is what tells you whether the business made money that month.
Some P&Ls also include a cost of goods sold section between revenue and operating expenses. This is the direct cost to make or buy what you sold—materials, labor to produce it, shipping to get it to you. If you run a bakery, the flour and eggs are COGS. If you resell products, what you paid your supplier is COGS. Subtract COGS from revenue to get gross profit, then subtract operating expenses from gross profit to get net profit. This breakdown helps you see whether your product pricing is healthy or whether your overhead is too high.
Gather your numbers from bank statements and receipts
You do not need special software to start. Open your business bank statements for the period you are covering (say, January 1 to January 31). Write down every deposit—that is your revenue. Then write down every expense: checks you wrote, card charges, transfers, automatic payments. Group them by category as you go (rent, payroll, supplies, etc.).
If your bank statement does not show what a charge was for, look at your receipts or invoices. A $500 charge from "ABC Corp" might be office supplies or it might be equipment—you need to know which category it belongs in so your P&L is accurate. Keep receipts and invoices for at least three years in case the IRS asks questions.
For expenses you do not pay by bank transfer—cash purchases, for example—keep a receipt and add them to the same list. If you paid $200 cash for supplies on January 15, that $200 belongs in your expenses even though it did not show up in your bank feed.
If you have employees and run payroll, your payroll provider (ADP, Gusto, Paychex) will give you a summary of gross wages paid each month. That number goes into your payroll expense line. If you paid yourself a salary, that goes in too. If you took money out of the business for personal use but it was not a salary, that usually does not go on the P&L—it goes on a different statement called a balance sheet or owner's equity statement.
Set up your P&L in a spreadsheet
Create a simple table in Excel, Google Sheets, or any spreadsheet tool. The first column lists each line item (Revenue, Rent, Payroll, Supplies, etc.). The second column shows the dollar amount for that line. The third column can show the percentage of revenue that each expense represents—this helps you spot if one category is eating too much of your income.
Here is the basic layout:
| Line Item | Amount | % of Revenue |
|---|---|---|
| Revenue | $50,000 | 100% |
| Cost of Goods Sold | $15,000 | 30% |
| Gross Profit | $35,000 | 70% |
| Rent | $8,000 | 16% |
| Payroll | $12,000 | 24% |
| Utilities | $1,200 | 2% |
| Supplies | $2,000 | 4% |
| Insurance | $1,500 | 3% |
| Total Operating Expenses | $24,700 | 49% |
| Net Profit | $10,300 | 21% |
Add rows for every expense category you actually have. Do not force yourself to use categories that do not apply to your business. If you do not have employees, skip the payroll line. If you work from home and have no rent, skip that line. The goal is a clear picture of your actual money flow, not a template that fits every business.
Save this spreadsheet and create a new one each month or quarter. At the end of the year, you can add a column for each month and see trends—whether revenue is growing, whether expenses are creeping up, whether profit is stable or shrinking.
Use accounting software to automate the work
If you want the P&L to update automatically, accounting software pulls data from your bank account and generates the statement for you. QuickBooks, FreshBooks, Xero, and Wave all do this. You connect your business bank account, categorize transactions once, and the software remembers the category for similar transactions going forward. At the end of the month, you click a button and the P&L is ready.
Wave is free for small businesses with no employees. QuickBooks and Xero charge monthly fees (usually $15 to $50 depending on features). FreshBooks is built more for service businesses and freelancers. The trade-off is that software costs money but saves you hours of manual entry and reduces mistakes.
Even if you use software, you still need to review the P&L each month. Check that transactions are categorized correctly—software sometimes guesses wrong. Make sure no expenses are missing. Verify that revenue matches what you actually invoiced or sold. The software is a tool; you are still responsible for accuracy.
Review your P&L to spot problems and opportunities
Once you have built the statement, read it like a story. Is revenue growing or flat? Are expenses staying the same or climbing? Is net profit healthy or shrinking? If profit dropped from last month, which expense line grew? If revenue is strong but profit is weak, your expenses are too high—look for the biggest categories and ask whether you can cut them.
Compare your P&L to previous months or years. If rent was $8,000 last January and $9,000 this January, you know your lease went up. If payroll was $10,000 last month and $12,000 this month, you hired someone or gave raises. If supplies jumped from $1,500 to $3,000, something changed—did you stock up, or are you wasting materials?
Use the percentage column to spot imbalances. If payroll is 60% of revenue, you are spending most of what you earn on labor—that might be unsustainable. If rent is 25% of revenue, that is high but not unusual for retail. If supplies are 15% of revenue, you might be able to negotiate better prices with vendors. These percentages vary by industry, but they help you see whether your business model is working.
Frequency and timing for building your P&L
Most small businesses build a P&L monthly. This gives you early warning if something is wrong—you catch a revenue drop or expense spike while you can still do something about it. Monthly P&Ls also make tax filing easier because you already have the numbers organized.
Some businesses build a P&L quarterly (every three months) if monthly feels like too much work. Quarterly is better than nothing, but monthly is better than quarterly because problems compound. If you do not notice that expenses are rising until the end of the quarter, you have already lost three months of profit.
At the end of the year, you will build an annual P&L for tax filing. Your accountant or tax software will use this to fill out your business tax return. If you have been building monthly P&Ls all year, the annual one is just adding up the twelve months—no extra work.
Frequently Asked Questions
Do I include owner's salary or personal draws on the P&L?
Owner's salary goes on the P&L as an expense if you pay yourself a regular wage like an employee. Personal draws (money you take out of the business for personal use) do not go on the P&L—they go on the balance sheet under owner's equity. Ask your accountant which method your business structure requires.
What if I have not kept receipts for all my expenses?
Go back through your bank and credit card statements and categorize what you can verify. For missing receipts, estimate based on what you remember or what is typical for that category. Be honest about what you do not know. The IRS expects you to keep receipts, so going forward, save everything.
Should I include taxes I owe on the P&L?
Income taxes you owe are not an operating expense and do not go on the P&L. Sales tax you collected from customers also does not go on the P&L—it is a liability you owe to the state. Payroll taxes (employer portion) do go on the P&L as an expense. Ask your accountant which taxes belong where for your business structure.
Can I use last year's P&L to predict this year's profit?
Last year's P&L is a starting point, not a prediction. If revenue was $500,000 last year, you might expect something similar this year—but only if nothing has changed. New customers, lost customers, price increases, new competitors, and seasonal swings all affect the numbers. Use last year as a baseline and adjust based on what you know about this year.
What if my P&L shows a loss every month?
A loss means expenses are higher than revenue. This is unsustainable long-term. Look at the biggest expense categories and ask: Can you cut costs? Can you raise prices? Is revenue too low because you are not selling enough, or because your prices are too low? Talk to your accountant or a business advisor about whether the business model works or needs to change.