Profit and loss account: what it is, the UK layout and a worked example

Short answer: a profit and loss account is the UK name for the report that shows a business’s income, costs and profit (or loss) over a period, usually its financial year. It starts with turnover (sales), takes off cost of sales to give gross profit, takes off the running costs to give operating profit, then interest to give profit before tax, and finally tax to give the profit for the financial year. It is the same report as a profit and loss statement, a P&L or an income statement; “profit and loss account” is simply the term UK company law uses, and the one on most UK year-end accounts. Xero calls it the Profit and Loss. A full worked example for a small limited company is below. If turnover and profit are the part that confuses, start with turnover vs profit.

Three things “profit and loss account” can mean

The phrase turns up in three places in UK accounts, which is why it confuses people:

Where you see it	What it means
The year-end accounts	The report of income, costs and profit for the year (this guide)
The Balance Sheet, under capital and reserves	The reserve: all the profit the company has kept since it started, after tax and dividends. Xero and most non-UK accounts call it retained earnings
Bookkeeping textbooks	The ledger account that income and expense accounts are closed into at the year end, before the result is moved to the reserve

In Xero you only need the first two. Xero’s Profit and Loss report is the first, and its Balance Sheet shows the profit so far this year as Current Year Earnings, then moves it into Retained Earnings after the year end without anyone posting a closing journal.

The layout, line by line

UK company accounts follow one of the formats in the Companies Act 2006. Most small companies use Format 1, which groups costs by what they are for:

Line	What goes in it
Turnover	Sales for the year, excluding VAT
Cost of sales	The direct cost of what was sold: materials, stock, subcontractors, often the wages of the people doing the work
Gross profit	Turnover − cost of sales
Distribution costs	Delivery, selling and marketing costs (many small companies put these in administrative expenses)
Administrative expenses	Everything else that keeps the business running: office wages, directors’ salaries, rent, insurance, software, accountancy, depreciation
Other operating income	Income that is not sales, such as rent received or a grant
Operating profit	Gross profit − distribution costs − administrative expenses + other operating income
Interest receivable / interest payable	Bank interest earned, and interest on loans, overdrafts and hire purchase
Profit before taxation	Operating profit + interest receivable − interest payable (see profit before tax)
Tax on profit	The corporation tax charge for the year
Profit for the financial year	What is left for the shareholders

Format 2 lists costs by their nature instead (raw materials, staff costs, depreciation, other operating charges), and some companies use it. Micro-entities reporting under FRS 105 use a shorter version with only a handful of lines: turnover, other income, raw materials and consumables, staff costs, depreciation, other charges, tax, and profit or loss.

Dividends are not on the profit and loss account. They are paid out of profit after tax, so they reduce the reserve on the Balance Sheet, not the profit.

A worked example: an electrical contractor in Bristol

These figures are made up. Hartley Electrical Ltd is a Bristol company with two directors and four electricians, and a year end of 31 March. This is its profit and loss account for the year to 31 March 2026, with the year before alongside, as it would appear in its year-end accounts:

£	2026	2025
Turnover	420,000	380,000
Cost of sales	(273,000)	(239,400)
Gross profit	147,000	140,600
Administrative expenses	(96,000)	(88,000)
Operating profit	51,000	52,600
Interest payable	(3,000)
Profit before taxation	48,000
Tax on profit	(9,120)
Profit for the financial year	38,880

(The 2025 column is shown down to operating profit only, to keep the comparison simple.)

• Cost of sales is materials and the electricians’ wages and pension costs: the costs that rise with each job.
• Administrative expenses include the directors’ salaries, the office and van costs, insurance, software, accountancy and depreciation on the vans and tools.
• Interest payable of £3,000 is on a van loan.
• Tax on profit is corporation tax at the 19% small profits rate on £48,000: 48,000 × 19% = £9,120. This assumes taxable profit equals accounting profit and there are no associated companies. In real accounts it rarely matches exactly: depreciation is added back and capital allowances are taken off, and profits between £50,000 and £250,000 pay a higher effective rate through marginal relief (the corporation tax calculator shows by how much).
• The directors paid themselves £30,000 in dividends during the year. That does not appear above: it comes out of the £38,880, so the profit and loss reserve on the Balance Sheet goes up by 38,880 − 30,000 = £8,880.

What it tells the owners

1. Sales grew, profit did not. Turnover rose by £40,000, or 10.5%, but operating profit fell from £52,600 to £51,000.
2. The margin is where it went. Gross margin was 140,600 ÷ 380,000 = 37.0% last year and 147,000 ÷ 420,000 = 35.0% this year. At last year’s margin, this year’s sales would have made 420,000 × 37% = £155,400 of gross profit: £8,400 more than they did. Materials prices rising faster than the company’s prices is the usual cause in a trade business; the price increase calculator shows what a small rise would have recovered.
3. Overheads grew too. Administrative expenses rose by £8,000 (9.1%), almost as fast as sales.

None of this needs anything beyond the two columns. The catch is timing: a private company has nine months after its year end to file its accounts, so the year-end profit and loss account can describe a margin problem that started eighteen months earlier. The same lines in Xero, month by month, show it while it is still happening (see Xero profit and loss by month).

How Xero’s Profit and Loss maps onto it

Xero’s Profit and Loss report has the same shape with more detail and slightly different headings:

Xero heading	Profit and loss account line
Trading Income (or Income)	Turnover
Cost of Sales	Cost of sales
Gross Profit	Gross profit
Other Income	Other operating income, or interest receivable
Operating Expenses	Mostly administrative expenses (and distribution costs, if your accountant splits them out)
Net Profit	Before interest and tax are split out, this is close to profit before tax

Three things usually differ between Xero during the year and the final accounts:

• Interest sits among the operating expenses in many Xero files; the accountant moves it below operating profit.
• Year-end adjustments (depreciation, accruals, prepayments, stock counts, work in progress) are posted by the accountant, often months after the year end, and can move profit by thousands.
• Corporation tax is usually posted as a year-end journal, so Xero’s Net Profit during the year is a pre-tax figure.

If the year-end accounts show a different profit from Xero, look for those journals first. How to read your Profit and Loss in Xero explains each line of Xero’s report, and the Xero annual report guide covers producing year-end statements from Xero.

Who has to prepare one, and who sees it

• Limited companies must prepare a profit and loss account every year and send it to their shareholders. It goes to HMRC, tagged in iXBRL, with the Company Tax Return.
• Companies House: today, small companies and micro-entities can choose not to file their profit and loss account (often called filing “filleted” accounts). The government confirmed in 2026 that, for accounts filed on or after 1 April 2028, small companies and micro-entities will have to file it, with an option for eligible companies not to have it published on the public register, and that all accounts will have to be filed through software. Check the current Companies House guidance closer to the date.
• Sole traders and partnerships do not file accounts anywhere, but they still need the same figures: the profit goes on the Self Assessment return, after HMRC’s adjustments (see trading profit and profit and loss statement for the self-employed).
• Banks and lenders almost always ask for the last two years’ profit and loss accounts, and often a recent management P&L from Xero as well.

Common mistakes when reading one

• Treating profit as cash. Profit for the year is not the money in the bank. Loan repayments, equipment purchases, VAT and dividends move cash without touching profit, and customers who have not paid yet count as sales. See profit but no cash.
• Comparing turnover without margin. Hartley’s sales growth hid a two-point fall in gross margin. Always work out gross margin and operating margin for both years (gross profit vs net profit and operating profit explain both).
• Looking for dividends or drawings on it. They are not costs, so they are not there. For a company they are in the reserve on the Balance Sheet; for a sole trader, drawings are on the Balance Sheet too.
• Mixing up the report and the reserve. “Profit and loss account: £64,000” on a Balance Sheet is the profit kept over the company’s whole life, not this year’s profit.

Common questions

What is a profit and loss account? A report of a business’s income and costs over a period, usually a year, ending in the profit or loss for that period. It shows turnover, cost of sales, gross profit, overheads, operating profit, interest, profit before tax, tax and the profit for the year.

Is a profit and loss account the same as a profit and loss statement? Yes. Profit and loss account, profit and loss statement, P&L and income statement all mean the same report. UK company law and most UK year-end accounts say profit and loss account; Xero calls it Profit and Loss.

What is the profit and loss account on a balance sheet? It is a reserve, not the report: the total profit the company has kept since it started, after tax and dividends. It is the same thing as retained earnings.

What goes on a profit and loss account? Turnover, cost of sales, gross profit, distribution and administrative expenses, other operating income, operating profit, interest, profit before tax, the tax charge and the profit for the financial year. Dividends, drawings, loan repayments and equipment purchases do not.

Do small companies have to file a profit and loss account at Companies House? Not at the moment: small companies and micro-entities can file accounts without it. For accounts filed on or after 1 April 2028, the government has confirmed they will have to file it, with an option for eligible companies not to have it shown on the public register.

How do I get a profit and loss account from Xero? Run Accounting › Reports › Profit and Loss for your financial year. It has the same structure as the statutory version with more detail; your accountant adds the year-end adjustments and corporation tax, and lays it out in the Companies Act format for the final accounts.

Read your Profit and Loss every Monday

The year-end profit and loss account tells you how last year went, months after it ended. ReportPilot reads your Xero figures and sends a short plain-English email every Monday, with a 24-month dashboard behind it: sales and profit against last month and the same month last year, the cash in the bank, money owed to you that is past due, and bills due in the next two weeks. It asks Xero for read-only access, and there is a 14-day free trial with no card.