Profit and loss statement (P&L)

The profit and loss statement, also known as an income statement, is a key financial report that sum­mar­ises a company’s revenues, expenses, and profits (or losses) over a specific period. While it is a separate financial statement from the balance sheet, its net result (profit or loss) impacts retained earnings within the equity section of the balance sheet. The P&L account provides crucial financial insights for business owners, investors, and auditors, ensuring trans­par­ency and com­pli­ance.

What is a profit & loss statement?

The profit and loss statement (P&L) sum­mar­ises a company’s revenues, expenses, and profits (or losses) over a specific period, such as a month, quarter, or year. It includes key com­pon­ents like revenue (sales), cost of sales, gross profit, operating expenses, operating profit (EBIT), and net profit or loss.

The P&L is essential for:

• Tracking prof­it­ab­il­ity
• Making informed business decisions
• At­tract­ing investors
• Ensuring com­pli­ance with auditors
• Cal­cu­lat­ing taxable income

As one of the three main financial state­ments—alongside the balance sheet and cash flow statement—it provides a clear picture of a company’s financial health.

Who needs to prepare a P&L statement?

In the UK, the re­quire­ment to prepare a profit & loss statement depends on the business type:

Legally required

• Limited Companies (LTD) & Public Limited Companies (PLC): Must submit a P&L to Companies House and HMRC under the Companies Act 2006.
• Micro & small companies: Micro-entities (FRS 105) must maintain a P&L for tax purposes but are not required to file it publicly. Small companies must prepare a P&L but can submit an abridged version to Companies House.
• Charities (income > £25k): Must submit financial state­ments, including a P&L.

Not legally required, but re­com­men­ded

• Sole traders & part­ner­ships: Not required to file, but needed for self-as­sess­ment tax returns.
• VAT-re­gistered busi­nesses: Helps track income, expenses, and VAT li­ab­il­it­ies.

Not required

• Employees, freel­an­cers earning < £1,000, and very small un­re­gistered busi­nesses: Do not need a formal P&L.

How to format a P&L statement

The P&L statement format in the UK varies based on business size, ac­count­ing standards, and reporting re­quire­ments. Companies must follow UK GAAP (FRS 102 / FRS 105) or IFRS, depending on their clas­si­fic­a­tion.

Full Format (for large companies & IFRS users)

• Used by large companies under IFRS or FRS 102.
• Provides a detailed breakdown of revenue, costs, and expenses.
• Includes operating profit, finance costs, and taxation details.

Example of a full format P&L statement

Company Name
For the Year Ended [Date]

Revenue

• Sales Revenue: £XXX,XXX
• Other Income: £XX,XXX
  Total Revenue: £XXX,XXX

Cost of Sales

• Cost of Sales: £XXX,XXX
  Gross Profit: £XXX,XXX

Operating Expenses

• Ad­min­is­trat­ive Expenses: £XX,XXX
• Selling & Dis­tri­bu­tion Expenses: £XX,XXX
• De­pre­ci­ation & Amort­isa­tion: £XX,XXX
  Total Operating Expenses: £XXX,XXX

Operating Profit (EBIT)

• Gross Profit - Operating Expenses = £XXX,XXX

Finance & Other Income

• Interest Income: £X,XXX
• Interest Payable: (£X,XXX)
• Other Gains/Losses: (£X,XXX)

Profit Before Tax (PBT)

• Operating Profit + Other Income - Other Expenses = £XXX,XXX

Taxation

• Cor­por­a­tion Tax: (£XX,XXX)

Net Profit / Loss

• Profit After Tax (Net Profit): £XXX,XXX

Abridged P&L Statement (for small companies – FRS 102 Section 1A)

• Small companies (turnover ≤ £10.2M, balance sheet ≤ £5.1M, ≤50 employees) can file abridged accounts.
• Less detail than a full P&L (some break­downs may be omitted).

Example of an abridged P&L statement

Company Name
For the Year Ended [Date]

Revenue: £XXX,XXX
Cost of Sales: (£XXX,XXX)
Gross Profit: £XXX,XXX
Operating Expenses: (£XXX,XXX)
Operating Profit: £XXX,XXX
Taxation: (£XX,XXX)
Net Profit / Loss: £XXX,XXX

Micro-Entity Format (for very small busi­nesses – FRS 105)

• Micro-entities (Turnover ≤ £632K, Balance Sheet ≤ £316K, ≤10 employees) can file highly sim­pli­fied accounts.
• They must prepare a P&L statement but do not have to file it publicly with Companies House.
• No re­quire­ment for detailed break­downs of income and expenses.
• The profit/loss is often combined into a single figure.

Example of a micro-entity P&L statement

Company Name
For the Year Ended [Date]

Turnover: £XXX,XXX
Expenses: (£XXX,XXX)
Profit Before Tax: £XXX,XXX
Taxation: (£XX,XXX)
Net Profit / Loss: £XXX,XXX

How to create a profit and loss statement step by step

A P&L statement provides an overview of a company’s financial per­form­ance by sum­mar­ising revenue, expenses, and profit over a specific period. Follow these seven steps to create an accurate P&L statement:

Step 1: Choose your reporting period

Decide on the time frame for your P&L:

• Monthly, quarterly, or annually (most busi­nesses prepare a yearly statement).
• The period should match your financial year-end as per Companies House or HMRC reporting.

Step 2: Record all revenue (sales & other income)

List all sources of income, including:

• Sales revenue – Total earnings from selling goods/services.
• Other income – Interest, grants, dividends, or rental income.

Step 3: Calculate Cost of Sales

Subtract the direct costs as­so­ci­ated with producing goods/services:

• Raw materials or inventory costs
• Man­u­fac­tur­ing or pro­duc­tion costs
• Direct labour costs

Step 4: Deduct operating expenses

Include all business-related costs, such as:

• Ad­min­is­trat­ive expenses (rent, salaries, office supplies)
• Marketing & ad­vert­ising costs
• Utilities & insurance
• De­pre­ci­ation & amort­isa­tion (for fixed assets)

Step 5: Account for finance costs & other income

This section includes:

• Interest payable on loans
• Bank charges or financing costs
• Other gains/losses (currency exchange, asset sales, etc.)

Step 6: Calculate profit before tax (PBT)

Determine the profit before tax by adding other income and sub­tract­ing finance costs from the operating profit.

Operating Profit + Other Income - Finance Costs = Profit Before Tax

Step 7: Deduct taxes (Cor­por­a­tion Tax / Income Tax)

Companies must pay cor­por­a­tion tax on their taxable profits, while sole traders and part­ner­ships pay income tax.

Please note the legal dis­claim­er for this article.