General business finance

Understanding your profit and loss statement

Your profit and loss statement (P&L) is critical to tracking your progress – so it’s important you understand how it works. This guide outlines the structure of a P&L and how you can use it to better manage your business.

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In this article

Why profit and loss statements are important

Along with your balance sheet, your profit and loss statement (P&L) is the most significant financial document your business will produce. It’s sometimes referred to as an ‘income and expenditure account’ or a ‘statement of financial performance.’

With modern accounting software, you can produce P&Ls at the click of a button. 

Your P&L is closely related to your balance sheet, so we recommend reading our article about understanding your balance sheet along with this guide.

Why your business needs a P&L

The main purpose of your P&L is to list all your income and expenses, and the difference between the two. That’s your profit or loss – and how you know whether your business is on track.

Your P&L usually shows the figures for this year and last, so it’s a great way to compare performance over time.


Every business produces a P&L (and a balance sheet) at least once a year for their annual tax return. However, producing quarterly or even monthly P&Ls can help you spot trends and take action to address them earlier. For example, you may notice that certain expense items have increased significantly since the previous P&L.

What’s included

The P&L is accrual based, not cash based. That means it includes all your income and expenses for the period, whether a payment has been made/received or not.

For example, if you’ve invoiced for goods sold but haven’t been paid for them yet, they’re still included on the P&L. This provides a more holistic picture of how your business is performing.

The P&L should also include:

  • Interest on any business loans (since this is an expense item)
  • Depreciation on capital items.

What’s not included

A P&L doesn’t include:

  • Any personal items
  • Any capital items
  • Any loans or repayment of the loan principal (the capital portion of the loan).

Example profit and loss statement

Now that we know the basics, here’s a typical example of how a P&L should be structured:

Acme Furniture Company Ltd
Profit and Loss Account: 2023 Tax Year






Less: Cost of Sales



Production expenses



Postage and packaging



Total cost of sales



Gross profit



Other income



Interest received



Gross income



Less: Expenses



Accountancy fees



Bad debts









Vehicle expenses



Office expenses






Shareholders salaries



Total expenses



Net profit (before tax)



Understanding the expenses on your P&L

Two lots of expenses are deducted from the income of the business: the direct costs of producing your goods or services (also known as cost of sales or cost of goods sold), and the fixed expenses (or overheads) of running your business. 

To understand more about why these expense categories are separated, and how to categorise them for your business, see our guide to understanding direct and fixed costs.

What you can learn about your business

The purpose of financial statements is to help you manage your business more effectively. Here is some of the key useful information your P&L gives you.

Gross profit margin

This ratio shows whether your average mark-up is sufficient to cover all expenses and show a profit. You can work this out using our gross profit margin calculator.

Expenses to sales ratio

This tells you if your expenses are increasing out of proportion to any growth in your business.

Using your P&L for analysis

There are a number of other ways you can analyse the information in your P&L. For example: 

  • You can look at the ratio of wages to sales to see whether wages are increasing or decreasing in proportion to any increase in sales. If wages are increasing faster than sales, you may need to take action to either increase your sales or reduce your wage bill.
  • You can also pick any particular expense that you wish to monitor, such as advertising to sales. This ratio would enable you to measure the effectiveness of your marketing.

For more about using ratios to check the health of your business, see our article Checking the financial health of your business.

How to prepare your financial statements

Learn about the two main financial statements for your business: the Balance Sheet and the Profit and Loss Statement, and how to calculate some key finance ratios like profitability, business efficiency, or business liquidity ratios.

Contact an ANZ Business Specialist

Our specialists understand your kind of business and the challenges you face as a business owner. We can help you figure out how to make your business grow and succeed.

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Important information

We’ve provided this material as a complimentary service. It is prepared based on information and sources ANZ believes to be reliable. ANZ cannot warrant its accuracy, completeness or suitability for your intended use. The content is information only, is subject to change, and isn’t a substitute for commercial judgement or professional advice, which you should seek before relying on it. To the extent the law allows, ANZ doesn’t accept any responsibility or liability for any direct or indirect loss or damage arising from any act or omissions by any person relying on this material.

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