A profit and loss account shows what your business earned, what it spent and what was left over, for a set period of time. You can prepare one from the records you already keep: your sales, your costs and the dates they happened.
It answers 1 question: did the business make money in that period?
To prepare one, you first need to know which lines it contains. If you want the longer explanation of what a profit and loss account is and how to read one, we cover that separately.
What goes into a profit and loss account?
4 kinds of line, always in the same order. You may also see it called a P&L, a profit and loss statement or an income statement. They are the same report.
| Line | What it means | Example |
|---|---|---|
| Sales (also called turnover or revenue) | Money you earned from customers in the period | Payments for jobs, products sold, rent received |
| Cost of sales | Costs directly tied to what you sold | Materials for a job, stock you resold, prints for a client |
| Expenses (overheads) | Costs of running the business, whatever you sold | Insurance, phone, software, fuel, rent |
| Profit or loss | What is left after the costs above | A positive figure is profit, a negative one is a loss |
2 subtotals help you read it. Gross profit is sales minus cost of sales. Net profit is gross profit minus expenses. Net profit is the bottom line most people mean when they say “profit”.
That’s the whole structure: money in, the cost of earning it, the cost of running the business, and what remains.
How to prepare a profit and loss account in 5 steps
With those 4 lines in mind, the preparation is the same whatever period you choose.
1. Pick the period
A month, a quarter or a year. Choose the period you want to judge. Many small businesses look at each month or quarter to keep an eye on things, and at the full year for the complete picture.
2. Gather the records for that period
You need every sale and every business cost dated inside the period. The usual places to look:
- your business bank account and card statements;
- invoices you sent and bills you received;
- receipts for things you paid in cash, including petty cash;
- payments you received in cash or by cheque, which may not appear on a statement at all.
Leave out anything personal. Your weekly food shop paid from the business account is not a business expense, and it does not belong in the report.
3. Sort each item into a line
Put each record into sales, cost of sales or an expense category. Keep the expense categories few and clear: fuel, insurance, phone, software, travel. You want to be able to look at a category next year and know what is in it.
4. Total each line
Add up sales. Add up cost of sales. Add up each expense category, then all expenses together.
5. Work out gross and net profit
Sales minus cost of sales gives gross profit. Gross profit minus expenses gives net profit, or a loss if the figure is negative.
Once the records are sorted, the sums are the easy part.
A worked example: how £18,400 of sales becomes £13,390 of profit
Here is a profit and loss account for a self-employed photographer, for July to September. The figures are an example, not real data.
| £ | |
|---|---|
| Sales | 18,400 |
| Cost of sales (prints and albums for clients) | 2,100 |
| Gross profit | 16,300 |
| Studio hire | 1,200 |
| Travel to shoots | 960 |
| Equipment insurance | 420 |
| Editing software | 180 |
| Phone | 150 |
| Total expenses | 2,910 |
| Net profit | 13,390 |
Read it from the top. The photographer earned £18,400, spent £2,100 producing what clients bought, and kept £16,300. Running the business cost another £2,910. What remains, £13,390, is the profit for the quarter.
The same layout works for an electrician (cable and fittings as cost of sales) or a landlord (rent as sales, repairs and letting fees as expenses). Only the line names change.
4 common mistakes that make the bottom line wrong
The list is not exhaustive, but each of these is easy to make and easy to fix before you total anything.
1. Treating profit as the money in your account. Depending on how you keep your books, profit can include sales a customer has not paid for yet. Your bank balance only counts what has actually arrived. A business can show a profit and still be short of cash, which is why cash flow is a separate thing to watch.
2. Mixing in personal spending. Business and personal costs in one pile make the report say something untrue about the business. Separate them before you total anything.
3. Forgetting cash. Cash sales and small cash purchases are the easiest records to lose. A missing receipt makes your costs look lower and your profit look higher than it really is.
4. Putting a big purchase in as an ordinary expense without asking. A new camera or van is used for years, so many people record it as a separate asset rather than a one-off cost. Whether that also changes how it is treated for tax depends on your accounting method and your situation. Ask your accountant before you put it in the report.
Let the records build the report
You can prepare a profit and loss account on paper or in a spreadsheet. If you would rather start that way, our free profit and loss template gives you the layout.
The trouble with a spreadsheet is that the report and the records live apart. Every month you copy figures across, check the formulas and hope nothing moved.
In EasyBooks, the report comes from the records. You enter each sale and cost once, and the profit and loss report is built from those transactions. The same records give you other reports too, including a balance sheet, a trial balance, a cash flow report and a monthly breakdown, so you can see profit month by month without building anything. If you already keep records in a spreadsheet, EasyBooks imports CSV files from spreadsheets on Mac, so you do not have to retype them.
If you run 2 or more businesses, or keep a rental property’s books next to your trade, each one gets its own separate set of books. A single subscription covers them all.
The simplest test is your own numbers: start your 14-day free trialstart your 14-day free trial, enter last month’s income and costs, and open the profit and loss report.
Is a P&L the same as an income statement? And 4 more questions
Is a profit and loss account the same as an income statement?
Yes, a profit and loss account, a profit and loss statement, a P&L and an income statement are names for the same report. All of them set sales against costs for a period and show the profit or loss that remains.
What is the difference between a profit and loss account and a balance sheet?
A profit and loss account covers a period, and a balance sheet shows a single day. The profit and loss account tells you what you earned and spent from, say, July to September. The balance sheet tells you what the business owns and owes on 30 September. Our guide to creating a balance sheet walks through the second one.
How often should I prepare a profit and loss account?
There is no single right answer: at least once a year for the full picture, and more often if you want to spot problems early. Monthly or quarterly reports make it easier to notice a cost creeping up while you can still do something about it.
Is my net profit the same as the profit I pay tax on?
Not always. Some costs are treated differently for tax than in your own profit and loss account, so the 2 figures can differ. Your accountant can tell you how that works for your business.
Can I prepare a profit and loss account on my phone?
Yes, in EasyBooks you can add transactions and open the profit and loss report on iPhone, iPad or Mac. It works offline too, and your books sync between your Apple devices when you are back online. There is more on that in our guide to a mobile bookkeeping app.
A single page tells you whether the business made money
That’s it: records you keep through the period, sorted into a few lines, and a report that tells you what the business made.
