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

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.

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.