What is a profit and loss statement?

By Book Keeping Pros
Sources checked 15 Oct 2026

Definition

A profit and loss statement shows a business's income and expenses over a period, such as a month, a quarter or a financial year, and the profit or loss left after expenses are taken from income. It is also called an income statement or a P&L.

A typical profit and loss statement starts with sales, takes away the direct cost of those sales to show gross profit, then takes away running costs such as rent and wages to show net profit. Each line is the total of one account, or a group of accounts, from the chart of accounts, so the way those accounts are set up decides how much detail the report shows. A monthly or quarterly report takes only the activity dated within that period, while a year-to-date report runs from the first day of the financial year.

Profit is not the same as cash. A business can show a profit for the year and still run short of cash if its customers pay slowly, which is why the profit and loss statement is read alongside a cash flow statement. How income and expenses are recorded also shapes the report. Under accrual accounting, a sale counts when it is earned and a cost when it is incurred, whether or not either has been paid. Under cash accounting, both count only when money changes hands, so a month can look better or worse simply because of when bills were paid.

At the end of the financial year, the income and expense accounts behind the report are closed off. They restart from nil for the new year, and the year's net profit or loss moves into equity on the balance sheet, which is why last year's sales do not appear in this year's figures. Comparing a period with the same period last year, or with the budget, is what turns the report from a record into a tool for decisions about prices, costs and staffing.

In Australia

business.gov.au describes the profit and loss statement as a financial statement listing sales and expenses, which you can use to work out the gross and net profit of a business.

Its guide to managing cash flow suggests regularly reviewing your main financial documents, such as your profit and loss statement, and comparing estimated and actual income and costs to spot shortfalls early. Its end of financial year checklist suggests measuring the year's results against the goals set at its start, and its checklist for spotting financial trouble includes watching profitability and cost trends.

The business.gov.au glossary treats gross profit as what is left from sales once the direct cost of producing them is taken away, and net profit, also called the bottom line, as gross profit less every other business expense. Cost of goods sold is described as the full direct cost of making a product or delivering a service, and overheads as the fixed costs of running the business, such as rent, marketing, utilities and administration.

Worked example

Illustrative example: a summary profit and loss statement for one financial year
Item	Amount (AUD)
Sales	120,000.00
Cost of sales	48,000.00
Gross profit	72,000.00
Operating expenses	51,500.00
Net profit	20,500.00

Illustrative example only: these rows show the method and are not sourced data.

Common mistakes

Treating profit as cash in the bank.
Comparing periods of different lengths, such as a five-week month with a four-week month, without allowing for it.
Running a monthly report that shows year-to-date figures, then reading them as that month's result.
Recording personal spending as a business expense, which overstates costs and understates profit.
Leaving unpaid supplier bills out at month end under accrual accounting, which makes the month look more profitable than it was.

Common questions

What is the difference between a profit and loss statement and a cash flow statement?

A profit and loss statement measures performance: whether the income earned in a period covered the costs of earning it. A cash flow statement measures money: what actually came into and left the business's accounts over the same period. The two answer different questions, so they are read together. The profit and loss statement tells you whether your prices and costs work, and the cash flow statement tells you whether you can pay the bills while that profit turns into cash.

Why is a profit and loss statement important in a business?

It is the main record of whether the business is making money from its trading. Read month by month, it shows which income lines are growing, which costs are creeping up and whether gross profit is holding as prices and supplier costs change. Lenders, investors and your accountant commonly ask for it, and comparing it with earlier periods or a budget is how problems show up while there is still time to act.

What is a profit and loss statement for a self-employed person?

It is the same report, prepared for a sole trader's business: the income the business earned over a period, less the costs of earning it, and the profit or loss left over. It covers business activity only, so personal spending stays out, and money the owner takes for personal use is generally recorded as drawings rather than as an expense. A self-employed person may be asked for one when applying for finance, and your accountant can confirm what it should include.

Related terms

Related service

Management and cash-flow reports

Monthly reports that show where the business stands.

More about management and cash-flow reports

Sources

Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
Guide to managing cash flow
business.gov.au, Australian Government. Current at 15 October 2026, released 22 December 2025. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.