Profit & Loss Statement

Learn It

The P&L is one of the most important reports in bookkeeping. It shows activity over a period of time — a month, a quarter, or a year. It answers the question: "Did this business make a profit or take a loss during this period?"

The P&L is not a list of everything the business owns and owes. That is the Balance Sheet, which we will cover in the next lesson. The P&L is about activity — revenue earned and expenses incurred during the period.

As we covered in Sales and Revenue, revenue is what the business earns from selling goods or services. Expenses are the costs of running the business. The P&L brings these together to show profit.

Structure of a P&L

A P&L flows from top to bottom:

Reporting Periods

A P&L always covers a specific period. Common periods are:

• Monthly: Shows profit or loss for a single month. Most useful for ongoing management.
• Quarterly: Shows three months combined. Useful for spotting trends.
• Yearly: Shows the full year. Used for tax preparation and annual review.

A P&L can also show comparative periods — this month vs. last month, or this year vs. last year. This helps the business owner see whether things are improving or getting worse.

Cash vs. Accrual Effects

The P&L looks different depending on whether the business uses cash-basis or accrual-basis bookkeeping. As we covered in Cash Basis vs. Accrual Basis, cash-basis records revenue when cash is received and expenses when cash is paid. Accrual-basis records revenue when it is earned and expenses when they are incurred — regardless of when cash moves.

An accrual-basis P&L gives a more accurate picture of profitability because it matches revenue to the expenses that helped earn it. A cash-basis P&L is simpler but can be misleading if there are large timing differences.

See It

Here is a complete monthly P&L for Northstar Creative, a small design business we have followed through earlier lessons:

Reading from top to bottom: the business earned $50,000 in revenue. The direct cost of products sold was $12,000, leaving a gross profit of $38,000. Operating expenses — rent, payroll, and software — totaled $20,200, leaving operating income of $17,800. After $300 in interest expense, the net income was $17,500.

This P&L tells the owner: "This month, the business earned more than it spent. The core operations produced $17,800 of profit before interest." That is useful information for making decisions.

How Bookkeepers Review a P&L

A bookkeeper does not just produce a P&L — they review it for reasonableness. Common things to check:

• Revenue trend: Is revenue higher or lower than last month? Is that expected?
• Expense spikes: Did any expense jump unexpectedly? Does it make sense?
• Margin check: Is gross profit margin consistent? A sudden drop may mean COGS was recorded incorrectly.
• Missing accounts: Are there accounts that should appear but do not? An expense may not have been recorded.
• Negative balances: Revenue should not be negative. Expenses should not be positive. These are warning signs.

The P&L also connects to the Balance Sheet. Net income from the P&L flows into equity on the Balance Sheet. If the P&L is wrong, the Balance Sheet will also be wrong.

Do It

Build a P&L from a list of accounts. Place only the accounts that belong on the P&L, then type the totals. Watch out for balance-sheet accounts that do not belong here.

Prove It

Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.

Ready for more than a short exercise?

Building one clean P&L from a short list of accounts is different from reviewing statements produced by a complete set of books and deciding whether the balances make sense. QBO Dojo practice clients let you work with realistic financial statements inside QuickBooks Online and spot issues across many accounts at once.

Key Takeaways