What is a profit and loss account?

A profit and loss account is the statement showing a business's income, the costs set against it, and the resulting profit or loss over a period, usually a month, quarter or year.

A plain-English definition for UK small businesses, not tax advice. Where a figure changes at a Budget, check gov.uk or ask your accountant.

LAST REVIEWED 29 AUGUST 2026 · BIZZLE

What does a profit and loss account show?

It answers one question: over this period, did the business make money? It starts with sales, deducts the direct cost of those sales to give gross profit, deducts overheads to give operating profit, and then takes off interest and tax to reach the net figure.

It is a statement about a stretch of time, which is what separates it from the balance sheet — a snapshot of what the business owns and owes on a single day. The two are linked: the profit at the bottom of one is what moves the retained profit on the other.

It is also not a cash statement. Sales count when invoiced, not when paid, and costs when incurred, not when settled. A business can show a healthy profit and have no money in the bank, and the profit and loss account will not tell you.

A worked example

A small café's year, laid out as its accountant would. Cost of sales is food, drink and packaging. Overheads are everything else it takes to keep the door open.

LineAmount
Sales£120,000
Cost of sales(£42,000)
Gross profit£78,000
Rent and rates(£18,000)
Wages(£36,000)
Other overheads(£9,000)
Net profit before tax£15,000

What do people misread?

Owners' pay. A sole trader's drawings are not an expense and do not appear, so the £15,000 above is what the owner earned, before tax. A company director's salary is an expense, so a company showing £15,000 profit has already paid its director something.

Equipment. A £6,000 van bought in the year is not a £6,000 cost in the year; it is an asset, and only its depreciation reaches the profit and loss account. That is why the bank balance and the profit figure so often disagree.

TERMS USED ON THIS PAGE

gross profitoverheadsbalance sheetretained profitsole traderdepreciationAll terms →

COMMON QUESTIONS

Questions people ask.

Is a profit and loss account the same as an income statement?

Yes. Income statement is the international and US term; profit and loss account, or P&L, is the traditional UK one. Company accounts filed in the UK may use either heading for the same statement.

How often should I look at it?

Monthly, if the bookkeeping is up to date enough to make it meaningful. A profit and loss account seen once a year, at year end, tells you what happened too late to do anything about it.

Why does my profit not match my bank balance?

Because profit and cash are different measures. Unpaid invoices count as sales, unpaid bills count as costs, equipment is spread over years as depreciation, and drawings, loan repayments and VAT move cash without touching profit at all.

Does a sole trader need a profit and loss account?

Not as a formal document, but the figures on a Self Assessment return are exactly a profit and loss account — turnover, expenses by category, profit — so in practice every sole trader prepares one, whether or not it is called that.

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