What Is a Profit and Loss Account?

Learn what a profit and loss account is, what it includes, who uses it, and whether it’s a legal requirement in the UK, with a simple example.

A profit and loss account (also known as a P&L or income statement) is a financial report that shows a business’s income, expenses, and profit or loss over a specific period. It’s one of the core financial statements used in business accounting, alongside the balance sheet and cash flow statement.

The main purpose of a profit and loss account is to show whether a business is making money and where that money is coming from—or going to. It provides a breakdown of revenues, costs, and operating performance, making it essential for assessing financial health.

What Are the Key Components of a Profit and Loss Account?

A standard profit and loss account includes several key sections:

  1. Turnover (Revenue): The total income from goods sold or services provided during the period.

  2. Cost of Sales: The direct costs associated with producing the goods or services sold, such as raw materials or labour.

  3. Gross Profit: Turnover minus cost of sales. This reflects how efficiently the core operations are running before overheads.

  4. Operating Expenses: Also known as overheads—includes rent, salaries, marketing, depreciation, and other administrative costs.

  5. Operating Profit: Gross profit minus operating expenses.

  6. Interest and Tax: Deductions for loan interest and corporation tax.

  7. Net Profit (or Loss): The final figure—what’s left after all expenses. This is the business’s profit or loss for the period.

Some P&L statements may also include other income (like interest or asset sales) and exceptional items, which are unusual or non-recurring costs.

Why Are They Important?

The profit and loss account is crucial for tracking business performance. It shows how profitable the business is over time and whether expenses are under control. This helps managers make informed decisions about pricing, investment, and cost-cutting.

It also plays a role in:

  • Tax calculations, as HMRC uses it to determine corporation tax owed.

  • Credit decisions, where lenders assess profitability and repayment capacity.

  • Investor confidence, by showing financial results and potential returns.

  • Internal planning, allowing owners and directors to review progress against targets.

Who Uses the Profit and Loss Account?

The profit and loss account is used by a wide range of stakeholders. Internally, business owners, finance managers, and directors rely on it to track performance. Externally, it’s used by shareholders, accountants, lenders, investors, HMRC, and—in the case of limited companies—Companies House.

In smaller businesses, the owner may review it monthly to stay on top of performance, while larger organisations use it for board reporting, budgeting, and forecasting.

How Often Are They Generated?

Profit and loss accounts are typically prepared monthly, quarterly, or annually, depending on the needs of the business. Larger or fast-moving businesses may generate them more frequently to keep a closer eye on trends. The annual P&L forms part of a company’s statutory financial statements, which are filed with Companies House.

Management P&L accounts may be produced more regularly for internal use, especially when performance needs to be monitored closely.

Are They a Legal Requirement in the UK?

Yes—for limited companies, preparing a profit and loss account is a legal requirement. Under the Companies Act 2006, all companies must prepare annual accounts that include a profit and loss statement unless they qualify as a micro-entity and choose to file only a simplified balance sheet. However, even micro-entities must still prepare a full P&L for internal and tax purposes, even if it’s not submitted publicly.

Sole traders and partnerships are not legally required to prepare a P&L for Companies House, but they must prepare one for HMRC Self Assessment to calculate tax owed.

Example of a Profit and Loss Account

Here’s a simple example of a profit and loss account for a small UK business for the year ending 31 March:

ABC Services Ltd – Profit and Loss Account
Year Ended 31 March 2024

Item :Amount (£)

Turnover: 120,000

Cost of Sales: 45,000

Gross Profit: 75,000

Administrative Expenses: 30,000

Marketing and Advertising: 5,000

Depreciation: 2,000

Operating Profit: 38,000

Bank Interest: -1,000

Profit Before Tax: 37,000

Corporation Tax (19%): -7,030

Net Profit: 29,970

This summary gives a clear view of how much profit was generated from operations, how much was lost to expenses, and what was left after tax.

Conclusion

The profit and loss account is a vital financial tool for any business, offering insight into income, cost control, and overall profitability. Whether used for internal monitoring, external reporting, or tax calculation, the P&L is central to responsible and informed financial management. Even where filing isn’t required, every business should maintain a regular and accurate profit and loss account to stay in control of its financial future.