How a profit and loss sheet is laid out
- Trading income: what you invoiced in the period, excluding GST or VAT.
- Cost of sales: stock, materials, and the labour or subcontractors that do the work you sell. Gross profit = trading income − cost of sales.
- Other income: money that does not come from trading, such as bank interest or a grant.
- Operating expenses: the cost of running the business whatever you sell, such as office wages, rent, vehicles, software and insurance. Net profit = gross profit + other income − operating expenses.
- Tax on the profit, if you want an after-tax figure.
This is the order Xero uses for its Profit and Loss report, so a sheet filled in here lines up with what your accountant or bookkeeper will later produce. For the difference between the two profit lines, see gross profit vs net profit.
Worked example: an electrical contractor's year
A UK electrical contractor run as a limited company with four electricians, one year, figures excluding VAT. Made-up figures to show the arithmetic.
| £ | |
|---|---|
| Sales | 380,000 |
| Materials | (99,600) |
| Electricians' wages and subcontractors | (122,000) |
| Tool hire and skips | (6,400) |
| Gross profit (40%) | 152,000 |
| Bank interest received | 600 |
| Office wages and the director's salary | (52,000) |
| Vans: fuel, repairs, insurance | (21,600) |
| Rent and utilities for the unit | (18,000) |
| Marketing, software, insurance, accountancy | (14,400) |
| Depreciation of vans and tools | (9,000) |
| Interest on van finance | (1,800) |
| Other expenses | (6,200) |
| Operating expenses | (123,000) |
| Net profit before tax (8%) | 29,600 |
| Corporation tax at the 19% small profits rate | (5,624) |
| Net profit after tax | 23,976 |
What it says to the owner:
- Price from the 40%. Each £100 of work leaves £40 after materials and the electricians' time. One point of margin is worth £3,800 a year, more than the whole software and marketing bill.
- The biggest cost sits above gross profit. The electricians' 122,000 is 32% of sales, so hours that are paid but not billed (travel, call-backs, quiet weeks) cut the margin before any overhead. The wage percentage calculator compares wages with sales and with a target.
- The cushion is 19%. Running costs less the interest received are 122,400; at a 40% margin that needs 306,000 of sales, so sales could fall 74,000 before the company made a loss. The break-even calculator works this out by month and week.
Press "Load the worked example" above to see it in the sheet. For a café and a sole trader laid out line by line, see the profit and loss statement example guide.
Mistakes that make a profit and loss sheet wrong
- Using the bank statement. Money received this month for last month's work is last month's sales. A sheet built from the bank is a cash summary; the net cash flow calculator is the right tool for that.
- Including GST or VAT. It belongs to the tax office. Enter sales and costs without it.
- Counting equipment as an expense. A van bought for 30,000 is an asset; only its depreciation (say 6,000 a year over five years) goes on the profit and loss.
- Counting drawings and loan repayments. Neither is an expense. Loan interest is.
- Putting all wages in cost of sales, or none. Only the people who do the work you sell are a direct cost. Getting this wrong moves gross margin, not net profit, but gross margin is the number you price from.
Profit is not cash
A profit and loss sheet can show a healthy profit in a month when the bank went down: customers who have not paid yet, stock bought ahead, a tax bill, a loan repayment or drawings all sit outside it. Profit but no cash goes through each reason. To read a P&L someone else has prepared, see how to read a profit and loss in Xero, and to see how it differs from the other main report, profit and loss vs balance sheet.
Filling one in for Centrelink? Centrelink has its own form and wording; see the Centrelink profit and loss statement guide.
Self-employed and need it as proof of income for a rental or a loan? The profit and loss statement for self-employed sole traders guide covers what agents and lenders usually ask for with it, and why your drawings stay off it.
Questions
- What goes on a profit and loss sheet?
- Income at the top (sales and other trading income), then cost of sales (stock, materials and the labour that does the work you sell), which gives gross profit. Then other income and the operating expenses of running the business (wages, rent, utilities, vehicles, marketing, software, insurance, accountancy, depreciation, interest), which gives net profit. Tax, if you include it, comes last.
- How do I make a simple profit and loss statement?
- Pick the period (a month, quarter or year). Add up the sales you invoiced in it, excluding GST or VAT. Take off the direct costs of those sales to get gross profit. Take off the running costs of the same period to get net profit. Use invoices and bills dated in the period, not the bank statement, or you get a cash summary instead of a profit and loss.
- Can I download this profit and loss template for Excel or Google Sheets?
- Yes. "Download spreadsheet" saves a CSV file that opens in Excel, Google Sheets or Numbers. The totals, gross profit, net profit and margins are formulas, so you can change any figure later and they recalculate. "Blank template" gives the same sheet with zeros.
- What is the difference between gross profit and net profit?
- Gross profit is sales minus the direct cost of what you sold. Net profit is what is left after the running costs of the business as well. A business can have a healthy gross profit and still make a net loss if its overheads are too high for its sales.
- Is a profit and loss statement the same as an income statement?
- Yes. Profit and loss statement, P&L, income statement and statement of financial performance are names for the same report: income and expenses for a period, and the profit or loss between them.
- Do I include drawings, loan repayments or GST/VAT?
- No. Owner drawings and the capital part of loan repayments are not expenses, and GST or VAT you collect is owed to the tax office, not income. Interest on a loan is an expense. Equipment goes on the balance sheet and reaches the profit and loss as depreciation over its life.
- I use Xero. Do I need this?
- Not for the statement itself: Xero builds it for you under Accounting › Reports › Profit and Loss, in the same order as this sheet, and can export it to Excel or Google Sheets. This sheet is for a business without accounting software, for a quick what-if, or for a form that asks you to fill in a P&L by hand.
- Are my figures stored or sent anywhere?
- No. The sheet and the download are built in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.
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This sheet gives an estimate from the figures you enter. It is not financial or tax advice. Xero is a trademark of Xero Limited. This tool and ReportPilot are independent and are not made or endorsed by Xero.