Accounting

What is Profit and Loss Statement (P&L)?

A P&L statement (also called income statement) shows your company's revenues, costs, and profits over a period of time.

Example

Revenue £150k - Cost of Sales £50k - Operating Expenses £70k = Net Profit £30k.

Key Dates

Prepared at year end; can be run monthly/quarterly for management

How Profit and Loss Statement (P&L) Works in Practice

The Profit and Loss statement (P&L), also known as the income statement, is one of the two core financial statements your company prepares. While the balance sheet shows your financial position at a single point, the P&L shows your financial performance over a period -- typically your accounting year, but also run monthly or quarterly for management purposes.

The P&L follows a structured format, starting with revenue at the top and working down through various expense categories to arrive at net profit at the bottom. The standard UK format under FRS 102 shows: Revenue, Cost of Sales, Gross Profit, Administrative Expenses, Operating Profit, Interest, Pre-tax Profit, Tax, and Net Profit. Each line tells you something specific about where the money went.

For Companies House filing, small companies can choose to file with reduced P&L information. Micro-entities may not need to file a P&L at all (just a balance sheet). However, you must always prepare a full P&L for your own management purposes and for HMRC as part of the CT600 filing. The HMRC submission requires more detail than Companies House.

Management P&Ls (prepared monthly or quarterly) are one of the most valuable tools for running your business. They let you see whether revenue is growing, whether margins are holding, and whether any expense category is growing faster than expected. Many directors only see their P&L once a year when their accountant prepares it -- this is too late to take corrective action if something is going wrong.

Step by Step

The P&L is built from your accounting records. All income transactions for the period are totalled to calculate revenue. All cost of sales transactions are totalled and deducted to give gross profit. All overhead and administrative expenses are totalled and deducted to give operating profit. Interest and tax are then applied to reach the final net profit figure.

Under accruals accounting (required for limited companies), the P&L records income when it is earned and expenses when they are incurred, regardless of when cash changes hands. An invoice raised in March counts as March revenue even if paid in May. A supplier bill received in March is a March expense even if paid in April. Accruals and prepayments are used at year end to ensure expenses match the correct period.

The P&L only includes revenue items -- income and expenses. Capital expenditure (buying equipment, vehicles, etc.) does not appear as an expense on the P&L. Instead, the asset appears on the balance sheet and depreciation (the annual reduction in value) appears as an expense on the P&L. This spreading of costs over the asset's life is the matching principle in action.

Practical Tips

Set up monthly management accounts so you can see P&L performance in near real-time, not just at year end
Compare your P&L month-on-month and year-on-year to spot trends in revenue, margins, and expense growth
Break your expenses into meaningful categories (not just one lump of 'admin expenses') so you can see where money is going
Review your P&L against your budget or forecast regularly -- actual vs. budget analysis is one of the most effective management tools

Common Mistakes to Avoid

Not running a P&L more than once a year -- monthly or quarterly management accounts are essential for good decision-making
Including capital expenditure as an expense on the P&L instead of capitalising it on the balance sheet
Comparing P&L periods of different lengths without adjusting for the difference
Forgetting to include accruals and prepayments at year end, which can significantly distort the profit figure

Frequently Asked Questions

Do I have to file a P&L with Companies House?

Small companies can choose to omit the P&L from their Companies House filing and only file a balance sheet. However, you must still prepare a P&L for HMRC as part of your Corporation Tax return. Micro-entities have additional filing simplifications.

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

The P&L shows profitability based on accruals accounting (when income is earned and costs are incurred). The cash flow statement shows actual cash movements (when money enters and leaves the bank). You can be profitable but cash-poor, or cash-rich but loss-making.

How often should I review my P&L?

Monthly is ideal for active businesses. At minimum, review quarterly so you can spot trends and take action before year end. Waiting for the annual P&L means you find out about problems 12 or more months after they started.

What format should my P&L follow?

UK companies follow the formats prescribed in FRS 102 (or FRS 105 for micro-entities). The most common format shows: Turnover, Cost of Sales, Gross Profit, Administrative Expenses, Operating Profit, Interest, Profit Before Tax, Tax, and Profit After Tax.

Why does my P&L show a profit but I have no cash?

Common reasons include: large accounts receivable (invoices sent but not paid), stock purchases tying up cash, capital expenditure (not shown on P&L but uses cash), and loan repayments (capital element not on P&L). The cash flow statement reconciles these differences.

Source: Companies House guidance on preparing annual accounts: https://www.gov.uk/annual-accounts

Related Terms

Balance Sheet

A balance sheet shows what your company owns (assets), what it owes (liabilities), and the difference (equity) at a specific point in time.

Profit

Profit is what's left after deducting all business expenses from your turnover. Corporation Tax is calculated on profit, not turnover.

Turnover

Turnover is your total business income before deducting any costs or expenses. It's also called revenue or gross income.

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