A ‘profit and loss statement’ and ‘income statement’ are different terms for the same report that showcases a company’s financial health. When you understand your business’s P&L/income statement, you not only get a snapshot of your financial health and expense management, but you can also spot opportunities for growth.
What you’ll learn
What you’ll learn
Updated: August 19, 2025
Key takeaways
- Profit and loss statement and income statement are different terms for the same financial report
- This financial statement reveals an organization’s overall financial health and can be a great planning tool
- Key components of this report include revenue, cost of goods sold, profit, operating expenses, and net income or loss
- This is one of the three key financial reports: income statement/P&L, balance sheet, and statement of cash flows
This statement provides an insider view of an organization’s revenue and expenses, as well as gross and net profit, highlighting financial performance over a specific time period. In this guide, we’ll explain their purpose, key pieces, tips on using them for financial reporting, and more.
What is a profit and loss statement?
Simply put, a profit and loss (P&L) statement is a financial report summarizing an organization’s revenue, operating expenses, and costs over a defined period of time, such as a quarter or a year. This financial statement shows whether your business made a profit or experienced losses during that period.
P&L statements are useful in day-to-day operations for businesses of all sizes because they highlight areas for growth and opportunities for improvement. Moving on, let’s get up to speed on the P&L’s identical twin: the income statement.
What is an income statement?
Likewise, an income statement summarizes your company’s revenue, expenses, and profits or losses over a specific time period. Additionally, it shows profit margins that reveal whether your company is profitable or not.
“Keep in mind that ‘income statement’ is the terminology often preferred in formal accounting, corporate reporting, and audits, while ‘Profit and Loss’ or ‘P&L’ is more common when casually referring to this report by accountants or investors.”
— David Kindness, CPA
How to prepare a statement
Now that we understand what an income statement/profit and loss is, and when you might use each term, let’s walk through how to create one.
- Determine your reporting period, such as monthly or annually.
- Examples of income include product sales, royalties, income from services, investment income, etc.
- Calculate your total revenue.
- Calculate your cost of goods sold, which covers costs incurred to produce all products or service you sold during the period at hand.
- Calculate gross profit, which is revenue minus cost of goods sold.
- Determine operating expenses, including rent/mortgage, office supplies, utility costs, subscriptions, travel, marketing, depreciation, and any other indirect costs of doing business.
- Calculate operating income by subtracting operating expenses from gross profit.
- Calculate interest expenses and taxes.
- Finally, calculate net income by subtracting interest and taxes from income (earnings before interest and taxes).
These calculations are how an income statement is produced, and they will provide a big picture of how your organization is doing financially.
Now that we better understand the purpose of each of these financial reports, let’s see if there are ways that they differ.
P&L versus income statement: What’s the difference?
As we mentioned earlier, these terms are used interchangeably to represent a financial snapshot of your business’s income, expenses, and profit. Some businesses or industries will prefer one term over the other. ‘Income statement’ is generally considered more formal, while ‘profit and loss’ is generally used more casually.
Key components of both reports
The key pieces of the puzzle you will see in this report include:
- Revenue: The total income you have generated by selling goods or services
- Cost of goods sold: Direct costs related to the cost of sales, such as labor and materials
- Gross profit: The profit your business earns before accounting for operating expenses
- Operating expenses: The costs of running your business, such as rent, utilities, office supplies, and more
- Net income or loss: Your total operating profit or loss during the specified period
This type of revenue tracking statement provides useful information for business strategy and accounting. Next, let’s go into more detail on how this data can make an impact on your organization’s bottom line.
How the P&L/income statement helps you run your business
The P&L/income statement is an essential tool to support your entire business with the following functions:
- Strategic decision-making: When you examine your net profit margin, you can determine where your business needs to adjust and what is already working well.
- Expense management: An income statement offers clear, quantitative evidence related to expense management. It should provide food for thought when it comes to cutting costs, if needed.
- Identifying profit trends: P&L statements will also help you pinpoint profit trends and areas for further growth.
- Planning for future growth: Finally, this statement will offer information for planning down the road, helping your leadership and finance team determine areas of focus and growth for the periods to come.
“Whether you’re calculating payroll taxes or piecing together a strategic planning process, income statements can help you make decisions and drive your business towards greater success.”
— David Kindness, CPA
Moving on, let’s see when it makes sense to put these data sets into practice.
When to use a P&L statement in your business
When should you use a P&L statement in your business? Almost any time! Here are some specific use cases to consider:
- Monthly check-ins: Are you meeting your ongoing financial goals? Where do you need to shore up sales or reduce expenses? Should you increase marketing spend? A monthly income statement check-in can provide valuable information for the rest of the fiscal year.
- Budget versus actual analysis: Creating a budget is one thing. Using it successfully is another. When you review your projected budget versus your actual financial situation, you can quickly determine where your organization is excelling and where it may be faltering.
- Profitability tracking: When you analyze profits and losses, you are better able to make informed decisions, optimize spending, and improve your bottom line.
The takeaway? This statement can support your business throughout the year.
How the income statement fits into broader financial reporting
Your income statement also aligns with your company’s broader financial reporting.
It’s integral to Generally Accepted Accounting Principles, which covers specific rules for recognizing revenue and expenses and making disclosures. It’s also a key tool during audits, providing up-to-date financial information.
Whether you are looking at debits versus credits or learning payroll basics, the income statement offers important information for decision-making, performance evaluation, and financial analysis. It is one of three key financial reports, including the balance sheet, which is a snapshot of assets, liabilities, and equity at a specific point in time, and the cash flow statement, which tracks the movement of cash into and out of your business.
So next, let’s touch on what to look for when reviewing this statement.
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Tips for reading and interpreting your income statement
Here are some helpful tips for reviewing income statements:
- Focus on margins, not just revenue: Even if your revenue is skyrocketing, your business can still be unprofitable if expenses are also sky-high. Margins show operational efficiency and provide a clear picture of your organization’s true financial health.
- Watch for red flags in expense categories: Common red flags encompass errors and violations, such as missing documentation, duplicate submissions, misclassified expenses, and unusual spending.
- Compare across periods: What does your income statement look like this quarter, versus the previous quarter, versus the same quarter last year? This information can help you gain a historical perspective on where you’ve been and where your business is going.
If you’re not already in the habit of reviewing your income statement monthly, this is a good place to start.
How to create a P&L/income statement (manually or with software)
You can create a P&L statement on your own or with the support of software. While a DIY spreadsheet might work okay when your business is small, accounting software can prevent errors and provide needed information as your business grows. You can turn to tools like QuickBooks, Xero, which have integrations with OnPay to make this process seamless and error-free.
If you do choose to create your own income statement, make sure that you use a consistent structure with clear labels while focusing on key financial metrics. Using a spreadsheet service like Microsoft Excel (paid), Google Sheets (free), or OpenOffice (free) will make manual P&L creation much smoother.
Understanding your P&L
Whether you call it a P&L or you prefer the term income statement, businesses large and small have a lot to gain by being familiar with this critically important financial report. From understanding how much you are spending to keep your business moving forward to getting an idea of where opportunities to increase revenue exist, the income statement can be a potential goldmine of information as you assess the next steps in your business.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.