A profit and loss account, also called a P&L, an income statement, or a statement of comprehensive income, is a financial report that summarises your business’s revenues, costs, and profits over a specific period.
It answers one fundamental question: did your business make money during this period, or did it lose money?
For UK limited companies, a P&L is a legal requirement, it must be prepared annually and filed with Companies House (in abbreviated form for small companies). Sole traders and partnerships also need a P&L to complete their Self Assessment tax returns, though the format is less formal.
What Does a P&L Include?
A typical profit and loss account contains the following:
| Line Item | What It Means |
| Revenue / Turnover | The total value of sales your business made |
| Cost of Sales (COGS) | Direct costs of producing your goods or services |
| Gross Profit | Revenue minus cost of sales |
| Operating Expenses | Indirect costs: rent, salaries, marketing, software |
| Operating Profit (EBIT) | Gross profit minus operating expenses |
| Interest | Interest paid on loans or received on savings |
| Profit Before Tax (PBT) | Operating profit adjusted for interest |
| Corporation Tax / Income Tax | Tax owed on profits |
| Net Profit | What’s left after all costs and tax |
P&L vs Balance Sheet: What’s the Difference?
The P&L shows performance over a period, what happened during the year. The balance sheet shows position at a point in time, what your business owns and owes right now.
A useful way to think about it: the P&L is like a video (it shows the journey), and the balance sheet is like a photograph (it shows where you are at the end).
Gross Profit vs Net Profit
These are two of the most important figures on your P&L:
- Gross profit = Revenue minus the direct cost of producing your goods or services. This tells you how efficiently your core business operates.
- Net profit = What’s left after every cost has been deducted, wages, rent, marketing, interest, and tax. This is the ‘bottom line’ figure.
| 📊 Example A bakery has £120,000 in annual revenue. Its ingredients and direct production costs total £45,000, giving a gross profit of £75,000. After rent, wages, utilities, and other overheads of £52,000, and corporation tax of £4,370, net profit is £18,630. |
How Often Should You Review Your P&L?
Most accountants recommend reviewing your P&L monthly. This lets you spot trends early, a rising cost, a dip in revenue, and act before small problems become large ones. Waiting until your annual accounts are filed means you may be flying blind for most of the year.
Good accounting software (Xero, QuickBooks, Sage) generates a P&L automatically from your transactions, making monthly review straightforward.
Frequently Asked Questions
Sole traders don’t have a legal obligation to prepare a formal P&L, but you will need to calculate your business income and allowable expenses to complete your Self Assessment tax return. Most accountants recommend keeping a simple P&L regardless.
It varies significantly by sector, but UK small businesses typically target a net profit margin of 10–20%. Retail tends to be lower (3–8%); professional services higher (20–35%).
The P&L records income when it’s earned and costs when they’re incurred, regardless of when cash actually changes hands. The cash flow statement records when money physically moves in and out of your account.
