Build a profit and loss statement: Examples with a step-by-Step guide

A profit and loss (or P&L) statement is an essential financial document that reveals how much money a company has earned in a given time period, listing every source of income and expenditure.

Also called an income statement, statement of earnings, or statement of operations, a profit and loss statement is a reliable indicator of your company’s performance and financial health. CFOs use P&L statements to project future income, allocate budget, and make informed financial decisions.

In this blog, we will:

• Explain important concepts related to P&L management
• Differentiate between P&Ls and similar financial statements
• Show you how to create a profit and loss statement
• Provide you with a profit and loss statement template

What is a profit and loss statement?

The P&L statement is a financial document that shows the difference between earnings and money spent—the net profit if you’ve earned more than you spent, or net loss if spending exceeds income. It consists of an itemized list of sources of revenue and expenses—and the resulting net profit or loss after calculating the difference. 

Companies usually create P&L statements quarterly and annually. The documents help businesses keep a closer eye on finances, stay precise with financial reporting, and let fewer tax filing mistakes slip through the cracks.

Profit and loss statement vs. Income statement

P&L statements and income statements are different names for the same thing: a financial document that shows an organization’s net profit or loss over a designated time period.

Profit and loss statement vs. Balance sheet

A balance sheet is a document that lists all of the company’s assets in the left column, and all the company’s liabilities and owner’s equity in the right column. Unlike a P&L, which shows inflows and outflows over a period of time, a balance sheet gives a glimpse into assets and liabilities on a specific date. Companies typically present a balance sheet to investors on the last day of the fiscal year. 

Publicly traded companies need to create and file profit and loss statements with the US Securities and Exchange Commission (SEC), adhering to the Generally Accepted Accounting Principles (GAAP). For quarterly filings, companies also need to include cash-flow statements and balance sheets. Corporations whose receipts and assets are worth more than $250,000 are required to submit balance sheets as part of their federal income tax return.

4 types of profit and loss statements

The four main ways of calculating your profit and loss statements are the single-step method, multi-step method, cash method, and accrual method.

1. Single-step method 

A single-step P&L statement only uses one equation to calculate net income: 

Net income = All revenue - All expenses

“All revenue” accounts for all your financial gains (sales revenue, interest income, rental income, capital gains, etc…), while “all expenses” accounts for everything from fixed and variable expenses to taxes, depreciation, and more. 

Grouping all income and deductions in this single-step method is a streamlined approach preferred by many small businesses and sole proprietorships. 

2. Multiple-step method

A multi-step income statement calculates gross profits, operating income, and net income. For this method, businesses should calculate:

1. Gross profit, by subtracting the cost of goods sold (COGS) from the revenue
2. Operating income, by subtracting operating expenses from gross profit
3. Net income, by adding operating income to non-operating items

Net Income = Non-operating Items + Operating Income

Non-operating items—including non-operating revenues, expenses, gains, and losses—are irregular activities outside the realm of a company’s normal business dealings. This includes transactions like selling or buying capital assets, fixing physical damage to office space, or acquiring another business.

In a multi-step approach, each source of income and expense is separated and categorized. Itemizing transactions provides a more transparent paper trail. If it feels overwhelming to manually log every transaction, consider expense management software to automate the process and eliminate human errors. 

Multi-step P&L statements can help businesses leverage more detailed financial reporting.

3. Cash method 

In this type of P&L statement, companies only account for when cash goes in or out of the business. Cash coming in is recorded as revenue and cash going out is recorded as a liability. This pared-down method is used by small businesses. 

Accrual method

Enterprise organizations working with larger sums of money may benefit from the accrual method, where revenue is recorded as it’s earned, regardless of whether it’s already posted in the bank account. Same with expenses, which companies record as they’re incurred, not at the moment of actual payment. For example, if you receive a bill in November and pay it in December, you’ll record it as a November expense.

This accrual method is popular because it paints a more precise picture of a company’s real-time earning and spending trends.

3 main benefits of profit and loss statements

Tracking your finances is always a good idea. Below are three concrete ways P&Ls can help your business:

1. Clear view of business financial health 

If you’re operating with a loss, a P&L statement can help you learn why.

With a detailed list of all gains and losses in a specific time frame, business owners can identify their risks and financial drains, and immediately intervene to control costs. At the same time, income statements reveal what brings the most profit, and helps decision makers double down on what works best. 

2. Informed decisions on cost management 

Profit and loss statements can be powerful financial management tools. Tracking every expense and income source provides a granular view of company finances, so CFOs can optimize spending, reduce costs, and allocate resources more effectively. 

3. Better communication with possible investors and stakeholders

By providing a transparent picture of a company’s financial performance, P&L statements can help business owners build trust with stakeholders. 

Potential investors can review the statements and assess the company’s growth potential and profitability; this way, CEOs can attract and negotiate funding.

Key components of profit and loss statements

P&L statements should include the following components:

1. Revenue

Revenue is a complete sum of money that comes into your company from all the sources (such as sales, interest, royalties, and subscription revenue), before any deductions, measured over a specific time period. 

2. Expenses

Expenses account for each cost related to running a business. Businesses categorize them in different ways, some of them being:

• Fixed expenses: Rent, salaries, monthly loan payments, property taxes
• Variable expenses: Sales commissions and performance bonuses, hourly wages, utilities
• Operating expenses: Office supplies, asset depreciation, tool subscriptions, marketing, advertising
• Non-operating expenses: Legal fees, restructuring costs, loss on sale of assets
• Capital expenses (CapEx): Renovating, purchasing new equipment, tech infrastructure upgrades

3. Gross profit

Gross profit is the income left over after you deduct the cost of goods sold (cost directly tied to creating and delivering a product or service) from revenue.

Net profit or loss 

Net profit is what’s left over after you deduct all costs from the revenue, reflecting what you can spend, save, or invest freely.

How to create a profit and loss statement: 9 steps

To create a detailed P&L statement, follow these nine steps: 

Step 1: Choose a reporting period

First, decide the time span you’ll cover with your P&L statement. Businesses may create profit and loss statements on a weekly, monthly, quarterly, or yearly basis. 

Step 2: Track the business revenue

Each time your business earns money, log it. Make sure to label each source of revenue correctly and build a legible, yet detailed, categorization system.

At the end of the reporting period, all the revenue added up will represent total operating revenue.

Step 3: Calculate the cost of goods sold

Cost of goods sold (COGS), accounts for the direct costs of creating the products a business sells within a specified timeframe. It includes materials and direct labor, but doesn’t include indirect costs (e.g., overhead like rent for office space) and other business expenses such as marketing or customer service.

To calculate COGS, add the beginning inventory to the purchases made during the reporting period, and subtract the ending inventory.

COGS = Beginning Inventory + Purchases - Ending Inventory

Keep in mind: COGS is a tax deductible. On the income statement, COGS is recorded as a business expense, and you can use the IRS Form 1125-A for tax deduction (learn more here).

Step 4: Subtract cost of goods sold from revenue to determine gross profit

Gross profit is the revenue you’re left with after you deduct the costs of creating and providing a product or service.
To calculate your gross profit, deduct the COGS from your revenue.

Profit = Revenue - COGS

Step 5: Record and calculate operating expenses

Operating expenses (OpEx) are the costs of running the business. This can include rent, utilities, equipment (with repair and maintenance), payroll, accounting, insurance, legal fees, marketing and advertising, travel, etc… The IRS considers operating expenses tax deductible.

Step 6: Calculate depreciation and amortization

Depreciation and amortization are non-cash expenses that reflect the decreasing value of business assets over time.

Depreciation relates to the wear and tear of physical assets (machines, equipment, furniture, etc…) Most accountants calculate it using the straight line method, which involves estimating how long companies expect the asset to generate revenue (e.g., its useful life) and how much companies can expect to earn if they sold the item when no longer used (e.g., its salvage value). 

To calculate straight line depreciation, subtract the salvage value from the asset’s initial cost, then divide that value by the estimated useful life. List it as a contra asset on your balance sheet, record it on your income statement as an expense, and then you can use it to lower your tax burden.  

You can similarly calculate amortization, which applies to intangible assets (like digital tools or usage rights).

Step 7: Determine your operating profit

Operating profit is the amount earned from performing core business functions, after deducting operating expenses, depreciation, and amortization. If operating profit is lower than operating expenses, you have an operating loss.

Here’s the formula to calculate your operating profit:

Operating Profit = Gross Profit - Operating expenses - Depreciation & Amortization

Step 8: Calculate interest and taxes

If you have a business line of credit, a credit card, or a loan, you need to calculate your total interest expenses for the time period covered by the P&L statement. For a quarterly income statement, simply add every monthly interest payment you’ve made in the quarter.

As for the taxes—P&L statements are used to calculate the effective tax rate, which are taxes you owe from total revenue earned. To calculate your effective tax rate, divide your income tax expenses by the company’s net income.

Effective Tax Rate = Tax Expense / Earnings Before Taxes

LLCs use P&L statements to report profit and losses on tax returns.

Step 9: Calculate net profit

Net profit appears at the bottom of your P&L, showing whether income outdid spending or vice versa. To calculate net profit, deduct taxes and all expenses from the gross profit.

Profit and loss statement example and template

To better illustrate what a P&L statement can look like, here’s an example template:

Rippling: Smart expense management to boost profitability

With Rippling, you can automate the expenses with complete control and streamline your P&L statement production.

Rippling consolidates all of your company’s finances— from payroll and benefits to corporate cards and expense management—giving you an up-to-date view of cash flow across your company and offering unprecedented control over spending patterns.

While most expense management solutions only allow for basic employee-manager approval chains, with Rippling expense management’s advanced policy engine, you can set hyper-custom policies based on the vendor, dollar amount, and expense category, helping you block out-of-policy expenses with ease. You can also tee up automated workflows that help you control spend, like triggering an alert when a department’s expenses sharply increase. 

With Rippling you can: 

• Automatically route expenses and bills to the right approver every time. 
• Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review. 
• Close the books faster with AI-powered transaction categorization, and integration with your accounting systems.

FAQs on profit and loss statements

Can I create my own P&L statement?

Yes, you can create your own P&L statement, so long as you carefully calculate everything—including revenue, cost of goods sold, operating expenses, and taxes—and follow guidelines from the Securities and Exchange Commission (SEC).

Can a P&L statement help with tax planning?

Yes. P&L statements can play an important role in tax management. Companies use them to calculate taxable income, find tax deduction opportunities, and estimate yearly taxes.

What’s the difference between gross and net profit?

Gross profit is the amount earned before subtracting expenses. Net profit is what’s left after all costs of doing business have been paid.

How can a P&L statement aid in securing funding?

P&L statements transparently show how profitable a business is and whether it has the capability to grow. This helps the investors assess the financial health of a business and make more informed funding decisions.

This blog is based on information available to Rippling as of December 3, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.