What is a P&L Statement?

What the P&L shows
Multi-step and simple formats

A profit and loss statement (P&L) is another name for the income statement. It lists a business's revenue and expenses for a period, such as a month, a quarter or a year, and ends with the result: net income if revenue was larger than expenses, or a net loss if expenses were larger. The balance sheet shows what a business owns and owes on one date; the P&L shows how it performed over a span of time.

Billed publishes this page. The definitions below come from three OpenStax open textbooks: Principles of Accounting, Volume 1 (section 2.3 and section 6.6), Introduction to Business 2e (section 14.5) and Entrepreneurship (section 9.4), all opened on October 29, 2026. This is general information, not accounting or tax advice; ask your accountant where judgment is needed.

What the P&L shows

OpenStax's Entrepreneurship text describes the income statement as "also called the profit-and-loss statement". Introduction to Business explains what it covers: "The income statement summarizes the firm’s revenues and expenses and shows its total profit or loss over a period of time."

Principles of Accounting puts it this way: "The income statement shows the financial performance of a business for a period of time. The net income or net loss will be carried forward to the statement of owner’s equity." That's how the P&L connects to equity and the balance sheet.

The main elements, using OpenStax's terms:

Revenue: what the business earned from selling goods or services.
Expenses: the costs of earning that revenue.
Gains and losses: OpenStax says "gains are similar to revenue but relate to “incidental or peripheral” activities of the organization", and losses are the matching counterpart to expenses.
Net income or net loss: revenue and gains minus expenses and losses. See net income.

Multi-step and simple formats

OpenStax describes two layouts. "A multi-step income statement is more detailed than a simple income statement."

Multi-step: the statement works down in stages.

Gross margin: "The multi-step statement separates cost of goods sold from operating expenses and deducts cost of goods sold from net sales to obtain a gross margin." Introduction to Business calls the same figure gross profit: "It is the difference between net sales and cost of goods sold."
Income from operations: "Operating expenses are daily operational costs not associated with the direct selling of products or services." OpenStax says "The two main types of operating expenses are selling expenses and general and administrative expenses," and "Deducting the operating expenses from gross margin produces income from operations." See operating margin.
Net income: other revenue and expenses, such as interest, come last. "Other revenue and expenses added to (or deducted from) income from operations produces net income (loss)."

Simple: "A simple income statement combines all revenues into one category, followed by all expenses, to produce net income." There are no subtotals for gross margin or income from operations.

Both formats reach the same net income. The multi-step format shows where along the way the profit is made or lost.

Worked example: one year's P&L, both formats

The business and figures here are a sample, invented for this example. It's a small retailer run as a sole proprietorship, so there's no income tax line.

Multi-step format:

Net sales: gross sales $180,000 − sales returns and allowances $5,000 = $175,000.
Gross margin: net sales $175,000 − cost of goods sold $70,000 = $105,000.
Operating expenses:
- selling: advertising $6,000;
- general and administrative: rent $18,000, wages $42,000, office supplies $2,500 and depreciation of equipment $3,500;
- total: $6,000 + $18,000 + $42,000 + $2,500 + $3,500 = $72,000.
Income from operations: $105,000 − $72,000 = $33,000.
Other revenue and expenses: interest revenue $400 − interest expense $1,900 = −$1,500.
Net income: $33,000 − $1,500 = $31,500.

Simple format, same figures:

Revenues: net sales $175,000 + interest revenue $400 = $175,400.
Expenses: cost of goods sold $70,000 + operating expenses $72,000 + interest expense $1,900 = $143,900.
Net income: $175,400 − $143,900 = $31,500, the same as the multi-step result.

Reading it: gross margin is $105,000 ÷ $175,000 = 60% of net sales, and net income is $31,500 ÷ $175,000 = 18% of net sales. Next year's P&L laid out the same way shows whether each of those moved, and the expense lines show which costs caused it.

Profit is not cash

OpenStax's Introduction to Business is direct about this: "It is very important to recognize that profit does not represent cash." The income statement "does not present the firm’s actual cash flows during the period."

In the example, some of the $175,000 of sales may still be unpaid invoices at year end, and the $3,500 of depreciation reduced profit without any cash leaving that year. To see where cash went, read the P&L next to the cash flow statement.

Reading your own P&L

Compare like with like. Put this period next to the same period last year, using the same format and the same expense categories.
Check the gross margin first. If it moved, look at prices and cost of goods sold before operating expenses.
Look for one-time items. Gains, losses and other revenue and expenses sit below income from operations so they don't hide how the core business did.
Keep owner money separate. In a sole proprietorship, owner draws aren't expenses; they reduce equity, not net income.
Use ratios for context. Financial ratio analysis uses P&L figures such as gross margin and profit margin. The profit margin calculator works out the percentages.

Where Billed fits

Billed publishes this page. Its financial reporting page lists "Income vs Expense Reports" among the reports Billed offers. Invoices from Billed's invoice software and records from its expense tracking are where those income and expense figures come from. Preparing the income statement for your books or tax return, in the formats above, is something you do yourself or with your accountant.

When this guide isn't for you

This page covers the P&L for sole proprietors and small businesses. If you need statements prepared under a specific reporting standard, for lenders or investors, or for a business with several entities, work with an accountant.

Frequently Asked Questions

Is a profit and loss statement the same as an income statement?

Yes. OpenStax describes the income statement as "also called the profit-and-loss statement". Both names mean a statement of a period's revenue and expenses, ending in net income or net loss.

What is the difference between a P&L and a balance sheet?

The P&L covers a period of time and shows revenue, expenses and the resulting profit or loss. The balance sheet shows assets, liabilities and equity on a single date. Net income from the P&L flows into equity on the balance sheet.

How do you calculate net income on a P&L?

Subtract all expenses and losses from all revenues and gains. In a multi-step statement, you get there in stages: net sales minus cost of goods sold leaves gross margin, minus operating expenses gives income from operations, and other revenue and expenses then give net income.

Why can a P&L show a profit when cash is low?

Profit isn't cash. Under accrual accounting, sales count as revenue when earned even if customers haven't paid yet, and some expenses, such as depreciation, don't use cash in the period. The cash flow statement shows where the cash actually went.

What is the difference between a multi-step and a simple income statement?

A multi-step statement shows subtotals for gross margin and income from operations before other revenue and expenses. A simple statement lists all revenues, then all expenses, and subtracts once. Both give the same net income.

Was this article helpful?

What Is a Profit and Loss Statement? A Simple Guide for Small Business