What Is Profit and Loss? P&L Meaning, Formula and Example

• Accounting
• Bookkeeping
• Small Business

Profit and loss means comparing business income with business expenses for a period, then seeing whether the result is profit or loss. A profit and loss statement, often called a P&L or income statement, turns that comparison into a report. It brings together revenue, cost of goods sold, gross profit, operating expenses and net profit so a small business can see what changed and why.

For small businesses, the P&L is most useful when it is reviewed regularly and read beside the balance sheet and cash flow statement. Profit tells one part of the story. Cash, unpaid invoices, supplier bills and tax liabilities tell the rest.

A useful Profit and Loss statement does not just show whether you made money. It shows which income, costs and margins deserve attention next.

Quick answer

A profit and loss statement reports income and expenses over a period, then shows profit or loss. business.gov.au’s profit and loss statement guide explains that a P&L lists sales and expenses, shows whether the business is making or losing money, and is usually completed monthly, quarterly or yearly.

If you are preparing a P&L for Australian records, state whether the figures are GST inclusive or GST exclusive. That one detail can prevent confusion when you compare the report with GST, BAS and tax records.

If you are new to the term, the Profit and Loss statement glossary is a useful companion.

Key points

• The P&L covers a period, such as a month, quarter or financial year.
• Revenue minus cost of goods sold gives gross profit; subtracting operating expenses helps show net profit or loss.
• A profitable P&L does not guarantee healthy cash flow.
• The report is only useful when invoices, bills, bank transactions and tax codes are kept clean.
• Review the P&L with the balance sheet and cash flow statement.

What does profit and loss mean?

Profit and loss means the result of comparing income with expenses for a set period. If income is higher than expenses, the business made a profit. If expenses are higher than income, the business made a loss.

The report is different from a bank balance because many businesses record sales before the customer pays and expenses before the supplier is paid. That is why the P&L should be read with accounts receivable, accounts payable, bank reconciliation and cash-flow information.

The main parts of a Profit and Loss statement

Some reports include extra sections such as other income, depreciation, finance costs or tax. The exact layout depends on your chart of accounts and reporting settings.

Profit and loss formula

At its simplest, profit and loss follows this formula:

Income - expenses = profit or loss

For a product business, the review often has two steps:

1. Revenue - cost of goods sold = gross profit
2. Gross profit - operating expenses = net profit or loss

Those formulas are useful, but they are only as reliable as the records behind them. If income is missing, supplier bills are late, GST is coded incorrectly or personal costs are mixed into business expenses, the P&L can still give the wrong signal.

How to read a P&L in five minutes

Start with the period and basis. A monthly cash-basis P&L tells a different story from an accrual P&L for the full financial year.

Then work down the report in this order:

1. Check revenue and ask whether sales are complete for the period.
2. Compare cost of goods sold with revenue so gross margin makes sense.
3. Scan operating expenses for unusually high, low or uncategorised lines.
4. Look at net profit or loss, then compare it with unpaid invoices, supplier bills, tax liabilities and bank balances.
5. Write down the one action the report suggests, such as following up debtors, reviewing prices, checking a cost category or cleaning up GST codes.

That quick review does not replace accountant advice, but it stops the P&L from becoming a report you open only at tax time.

Profit and loss, balance sheet and cash flow compared

These three reports work together, but they answer different questions.

Use the P&L first when you want to understand trading performance. Use the balance sheet and cash flow statement when you need to know whether that profit has turned into cash or is tied up in unpaid invoices, stock, equipment, tax liabilities or owner drawings.

Simple example

In this example, the business made a profit. The next question is whether that profit is enough after considering unpaid invoices, upcoming supplier bills, loan repayments, tax and owner drawings.

That is why the P&L should never be read alone.

What the P&L can tell you

Whether sales are growing

Compare revenue month by month, quarter by quarter or year on year. A sales increase is good only if margin and cash collection are also healthy.

Whether margin is improving

Gross profit margin can show whether pricing or direct costs need attention. If revenue is up but gross margin is falling, the business may be working harder for less return.

Whether overheads are creeping up

Subscriptions, insurance, contractors, advertising and finance costs can drift upward. A monthly P&L review helps catch those changes early.

Whether the chart of accounts is useful

If every expense is coded to “miscellaneous”, the P&L cannot guide decisions. A clean chart of accounts makes the report more useful.

Profit is not the same as cash

A business can show profit but still feel short of cash. Common reasons include:

• customers have not paid invoices yet
• inventory or equipment purchases used cash
• supplier bills are due soon
• GST, PAYG or super liabilities are waiting
• loan repayments reduce cash but may not appear as normal expenses
• owner drawings reduce bank balance

Review accounts receivable ageing, accounts payable and bank reconciliation before relying on profit alone.

GST and the P&L

For GST-registered Australian businesses, GST collected from customers is usually a liability to the ATO rather than true income. GST paid on purchases may also be treated separately rather than as a normal expense, depending on setup.

That makes tax code accuracy important. If GST is coded incorrectly, the P&L and BAS reports can both become harder to trust. The GST, VAT and sales tax guide is a practical starting point for checking software setup, and the Business Activity Statement glossary explains how BAS reporting fits around GST, PAYG and other activity statement amounts.

What to check before trusting your P&L

A P&L is only as reliable as the records behind it. business.gov.au’s record-keeping guidance says business records include income, expenses, bank records, GST records, employee and contractor records, and end-of-year debtors and creditors.

Before making decisions from the report, check:

• bank accounts are reconciled and missing transactions have been imported
• invoices and customer payments are matched, not duplicated
• supplier bills and expenses are coded to the right accounts
• GST tax codes match the transaction type
• wages, super and PAYG withholding are not mixed into unrelated expense lines
• ATO interest or penalties are flagged separately instead of being hidden in ordinary operating expenses
• owner drawings, loan repayments and asset purchases are not treated as ordinary operating expenses

These checks make the P&L more useful for pricing, tax planning, cash-flow review and conversations with your accountant.

If you see ATO general interest charge or shortfall interest charge in the records, treat it as a separate review item. The ATO interest charges guide explains why GIC and SIC incurred from 1 July 2025 need careful coding before tax time.

How to use the P&L in accounting software

Once the report is clean, use it as a decision tool rather than a year-end form. A good monthly review usually asks:

• how this month compares with last month, last quarter or the same month last year
• whether revenue growth came with stronger or weaker gross margin
• which expense categories moved enough to need explanation
• whether payroll, contractor, software or finance costs are changing faster than sales
• whether the report agrees with what you see in bank feeds, unpaid invoices and supplier bills

In Gimbla, the P&L becomes more useful when invoices, bills, bank feeds, bank reconciliation, GST settings and the chart of accounts are kept together. That gives you a clearer path from “profit changed” to “here is the transaction, customer, supplier or account that caused it”.

A monthly P&L review checklist

1. Confirm bank accounts are reconciled.
2. Check sales for missing or duplicated invoices.
3. Review cost of goods sold and direct costs.
4. Look for unusual expense movements.
5. Check uncategorised or suspense accounts.
6. Compare gross margin to prior periods.
7. Review unpaid invoices and supplier bills.
8. Write down the one decision the report suggests.

The final step matters. Reports should lead to action, such as following up overdue invoices, reviewing prices, renegotiating supplier costs or cleaning up expense categories.

Frequently asked questions

What is a Profit and Loss statement?

A Profit and Loss statement shows income, expenses and profit or loss for a period such as a month, quarter or financial year.

What does profit and loss mean in business?

Profit and loss means the result of comparing business income with business expenses for a period. If income is higher than expenses, the business made a profit. If expenses are higher than income, it made a loss.

Is Profit and Loss the same as cash flow?

No. Profit and Loss shows financial performance over a period. Cash flow shows actual cash movements. A business can be profitable and still short of cash.

Does GST appear in Profit and Loss?

GST is usually tracked separately from income and expenses when the business collects and remits it. Check your accounting method and software setup with your accountant.

How often should a small business review Profit and Loss?

Monthly review is a strong habit because it helps you identify revenue, margin and cost changes before year end.

Conclusion

The Profit and Loss statement is one of the most useful reports in a small business, but only when it is read with context. Use it to ask better questions: what changed, what caused it and what should we do next?

In Gimbla, keep invoices, bills, bank reconciliation and tax settings tidy so the P&L reflects real business activity rather than clean-up work waiting for tax time.