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How to read a profit and loss statement
A profit and loss statement shows what the business sold, what it spent and what was left. Here is how to read one, line by line.
The short answer
A profit and loss statement shows a business's sales, its costs and the profit or loss it made over a period, such as its financial year. In a company's annual accounts it is called the profit and loss account. Read it from the top: sales, less the cost of what was sold, gives gross profit; other running costs, interest and tax then leave the profit or loss for the year. Profit is not the same as cash in the bank.
What it shows
GOV.UK says a company's statutory accounts must include a balance sheet and a profit and loss account. The profit and loss account "shows the company's sales, running costs and the profit or loss it has made over the financial year".1 The balance sheet is different: it shows what the company owns, owes and is owed on the last day of the year.1
You may also see a profit and loss statement for a month or a quarter, for example in management accounts. The layout is the same; only the period changes.
Example profit and loss statement (example figures)
The figures below are made up to show how the lines fit together. They are not from a real business. The line names follow one of the layouts the law sets out for small company accounts.2
| Line | Example figure | What it means |
|---|---|---|
| Turnover | £250,000 | What the business sold in the period. |
| Cost of sales | (£150,000) | The cost of what was sold, such as stock or materials. Brackets mean a cost taken off. |
| Gross profit | £100,000 | Turnover less cost of sales. |
| Distribution costs | (£10,000) | Costs of getting goods to customers, such as delivery. |
| Administrative expenses | (£60,000) | Running costs, such as rent, office salaries, insurance and professional fees. |
| Interest payable | (£2,000) | Interest on loans and overdrafts. |
| Tax on profit | (£5,320) | Corporation Tax. In this example, 19% of £28,000 (see below). |
| Profit for the financial year | £22,680 | What is left after every cost and tax. |
The tax line in the example uses the 19% small profits rate, which GOV.UK says applies to a company with profits of £50,000 or less.3 It is simplified: it ignores any adjustments to profit for tax, and assumes a full 12-month year and no associated companies, which GOV.UK says change the limits.3 A real tax figure comes from the company's tax return.
Gross profit and net profit
Gross profit is turnover less cost of sales. In the example it is £100,000, which is 40% of turnover. That percentage is known as the gross margin. It shows how much of each sale is left to pay for everything else.
"Net profit" is a common term but not one of the lines the law sets out.2 People use it to mean profit after all costs, sometimes before tax and sometimes after. If someone quotes a net profit figure, ask which one they mean.
Things to check when you read one
This part is our judgement, not a rule.
- The period. Check the dates at the top. A year and a month are not comparable without adjusting.
- Last year's figures. Company accounts must show the previous year's figure beside each line.2 A change is a reason to ask why, not proof of a problem.
- One-off items. A single large sale or cost can make one period look better or worse than normal.
- Directors' pay. In a company, salaries are a cost in the profit and loss statement. Dividends are not: GOV.UK says a dividend is a payment a company can make to shareholders if it has made a profit, and dividends cannot be counted as business costs for Corporation Tax.4
- Cash. A profit does not mean the money is in the bank. Customers may not have paid yet, and stock or loan repayments use cash without being a cost on this statement. See Making a profit but short of cash.
Your published accounts may not show it
A small company must still send its full statutory accounts to its shareholders and to HMRC. But GOV.UK says a small company can choose not to send its profit and loss account to Companies House, and a micro-entity can send only its balance sheet.5 So a company's record on Companies House may not show its profit or loss at all.
When to ask for help
Your accountant prepares the annual accounts and can talk you through them. If you want the same figures during the year, to see how the business is doing before the year end, that is what management accounts are for. A bookkeeper can keep the records up to date so the figures are ready when you need them.
Sources
- GOV.UK, "Prepare annual accounts for a private limited company" ("How to put together statutory accounts"). gov.uk/annual-accounts. Checked 21 October 2026.
- The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008 (SI 2008/409), Schedule 1, Part 1 (paragraph 7, previous year's figures; Section B, profit and loss account Format 1). legislation.gov.uk/uksi/2008/409/schedule/1/part/1. Checked 21 October 2026.
- GOV.UK, "Corporation Tax rates and reliefs" (small profits rate; thresholds reduced for short accounting periods and associated companies). gov.uk/corporation-tax-rates. Checked 21 October 2026.
- GOV.UK, "Running a limited company: Taking money out of a limited company" ("Dividends"). gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company. Checked 21 October 2026.
- GOV.UK, "Prepare annual accounts for a private limited company: Micro-entities, small and dormant companies". gov.uk/annual-accounts/microentities-small-and-dormant-companies. Checked 21 October 2026.