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

Note

Limited companies are required to prepare a profit & loss statement, though small and micro-entities have the option not to disclose it publicly. Sole traders and partnerships are not obligated to produce a formal P&L, but maintaining one is crucial for tax reporting. Large businesses adhere to IFRS or FRS 102, whereas small and micro-entities use simplified FRS 102/105 standards.

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.

Was this article helpful?
Go to Main Menu