Profit and loss accounts explained

A profit and loss account is a financial statement that shows the income and outgoings of a business over a certain period of time, and the net profit or loss for that time. That is the British Business Bank’s definition. You will also see it called a profit and loss statement, a P&L or an income statement.

The key word is period. A P&L covers a month, a quarter or a year, so it shows how the business traded during that time rather than what it owns on a single day.

A profit and loss account lists turnover first, takes off the costs of delivering what you sold, then takes off the running costs, interest and tax to reach the final result. The British Business Bank’s glossary defines turnover as the total sales of a business during a specified period.

Exact layouts vary. Company accounts follow set formats, and a management P&L for your own use can be as detailed as you like. For the separate measures, see our guides to gross profit margin and net profit.

You read a profit and loss account from the top down, checking whether each profit line is positive and how it compares with the same period last time. The top line shows how much the business sold, and each line down shows what was left after another group of costs.

• Compare periods. A figure on its own says little. Put this year beside last year, or this quarter beside the same quarter, to see direction.
• Watch the gap between lines. If turnover grows but profit does not, costs are growing faster than sales.
• Look at the interest line. It shows how much of the profit existing borrowing already takes. Our guide to interest cover shows how lenders measure it.
• Ask what is one-off. A single large sale or cost can distort one period.

A profit and loss account covers a period of time and shows performance, while a balance sheet is a snapshot at one date and shows what the business owns and owes. Company accounts include both.

A profit and loss account is also where you spot trouble in the running of the business, while the balance sheet shows whether the business is financed safely, for example how much is owed to lenders and suppliers against what it holds.

Read together they give the full picture. Our guide to the balance sheet covers the other half.

Yes. A profit and loss account shows income and costs for the period, not when the money moved, so a profitable business can still be short of cash. A large sale that the customer has not yet paid for counts as turnover in the P&L but is not in the bank.

That is why lenders and accountants look at cash flow as well. See our guides to cash flow forecasts and working capital for the cash side.

Limited companies have to prepare one as part of their annual accounts, and sole traders have to keep records of income and expenses, which is the information a P&L is built from.

• Limited companies. Companies House guidance says accounts must generally include a profit and loss account, a balance sheet signed by a director on behalf of the board, and notes to the accounts. Records must be kept for 6 years from the end of the last company financial year they relate to, or longer in some cases.
• Small companies at Companies House. Currently, small companies do not have to deliver a copy of the profit and loss account to Companies House. The guidance says that from 1 April 2028 they will have to deliver it, with the option to opt out of publishing it on the register. The same guidance says abridged accounts will no longer be allowed from that date.
• Sole traders. GOV.UK says sole traders must keep records of business income and expenses for their Self Assessment tax return. Taxable profit is turnover less allowable expenses, and allowable expenses do not include money taken from the business for personal use.

Filing deadlines and requirements change, so check GOV.UK or ask an accountant before you rely on this. Capzy does not give accounting or tax advice. Our guide to filing company accounts covers the process.

Statutory accounts are annual, but a management P&L is more useful monthly because it shows problems while there is time to act. A monthly P&L next to a cash flow forecast gives an early warning on margins, costs and cash.

Keep the layout the same from period to period so the comparisons mean something, and record costs in the period they belong to.

A common routine is to close each month within a couple of weeks, compare it with the same month last year and with your budget, and write down one reason for each big difference. After a few months the notes show patterns, such as a cost that creeps up or a product that sells well but earns little.

Accounting software can produce the report for you, but the figures are only as good as the bookkeeping behind them. Make sure every sale and cost is recorded and coded to the right line, and ask your accountant to review the first few reports.

Lenders ask for a profit and loss account to see whether the business is trading profitably and whether it can afford to repay new borrowing. It also shows the trend: growing, flat or falling.

Expect them to ask for filed accounts, more recent management accounts and sometimes bank statements. What each lender wants varies, and any offer is subject to status and lender criteria. If your latest figures are weak, you will do better to understand why before applying. Our guide to business loan requirements covers what is commonly asked for, and the lender directory shows who offers what.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not prepare accounts. We introduce businesses to lenders and set out what comes back so you can compare it.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. For the accounts themselves, use a qualified accountant.