What is a profit and loss statement?
A profit and loss (P&L) statement is a financial report that summarises a business’s income, costs, and expenses over a specific period — typically a month, quarter, or financial year. Also known as an income statement or earnings statement, it reveals whether a business has made a profit or incurred a loss during that time.
For Australian small businesses, the P&L is a vital tool for understanding financial performance, managing expenses, and meeting tax reporting requirements. Along with the balance sheet and cash flow statement, it forms one of the three core financial statements.
Key components of a P&L statement
- Revenue: All income earned through sales of goods or services
- Cost of Goods Sold (COGS): The direct costs of producing goods or delivering services
- Gross Profit: Revenue minus COGS
- Operating Expenses: Ongoing business costs such as rent, wages, utilities, insurance, and marketing
- Net Profit or Loss: The final figure after all expenses have been deducted from gross profit
Why is a P&L statement important?
The P&L statement helps business owners make informed decisions by identifying spending trends, evaluating profitability, and setting realistic sales targets. It can also support price-setting strategies by revealing whether current pricing covers all costs effectively.
For incorporated companies in Australia, the P&L is a legal requirement and must be made publicly available. Non-incorporated businesses are not legally required to prepare one, but it remains one of the most useful tools for maintaining financial clarity and supporting long-term growth. P&L statements can be prepared on a cash basis (recording income and expenses when cash is received or paid) or an accrual basis (recording when transactions occur).