3 min read
What the P&L is actually measuring
The profit and loss account — also called the income statement — summarises all revenue your company generated and all costs it incurred over a specific period, typically a financial year or a management reporting month. The bottom line is net profit (or loss): what remains after every expense has been deducted from total income.
Critically, the P&L is prepared on an accruals basis. Income is recognised when it is earned, not when the customer pays; costs are recognised when the obligation arises, not when the invoice is settled. This means the P&L can show a healthy profit even when cash is tight — a distinction that often surprises directors seeing their accounts for the first time.
Revenue and cost of sales
The P&L opens with revenue (or turnover): the total value of goods sold or services delivered in the period. Directly beneath it sits cost of sales (sometimes called cost of goods sold, or COGS) — the direct costs that vary with output, such as raw materials, bought-in components, or subcontractor fees.
Revenue minus cost of sales gives you gross profit. Gross profit margin — gross profit expressed as a percentage of revenue — is one of the most useful measures of underlying commercial efficiency. If it is shrinking quarter on quarter, input costs may be rising faster than prices, or the sales mix may be shifting towards lower-margin work.
Overheads and operating profit
Below gross profit sit operating expenses (overheads): costs that support the business as a whole rather than varying directly with output. Typical examples include rent, salaries for support functions, software subscriptions, marketing spend, and depreciation on fixed assets.
Gross profit minus operating expenses gives operating profit (sometimes labelled EBIT — earnings before interest and tax). This figure strips out financing costs and tax, making it useful for comparing operating performance across periods or against similar businesses.
Interest, tax and net profit
From operating profit, the P&L then deducts interest on loans and other finance costs, arriving at profit before tax (PBT). Corporation tax is then applied — for most UK companies at the rate set by HMRC for that financial year — to produce net profit after tax, the true bottom line.
Net profit is then carried to the balance sheet as retained earnings, increasing the company's net worth. Dividends paid to shareholders come from retained earnings and will appear in the statement of changes in equity, not the P&L itself. Confirm the tax treatment of any specific item with your accountant.
Common misreadings to avoid
Directors most often trip up by treating P&L profit as available cash. Profit and cash are different: a company can be profitable and still run out of money if customers pay slowly, stock builds up, or loan repayments fall due. The cash flow statement (a separate document) addresses this gap.
- Depreciation reduces profit but involves no cash outflow in the period
- A large invoice raised but not yet paid boosts revenue without adding cash
- Stock purchased but unsold sits on the balance sheet, not in cost of sales
- Director loan repayments do not appear in the P&L at all
Frequently asked questions
Is the P&L the same as a management account?
Management accounts typically include a P&L but are produced more frequently (monthly or quarterly) and in more detail than statutory accounts. They are for internal use and are not filed at Companies House.
Why might my P&L show a profit but my bank account looks empty?
Profit is an accruals-basis figure; cash is what is actually in the account. Timing differences — slow-paying customers, loan capital repayments, VAT settlements and stock purchases — all create a gap between the two. Your cash flow statement reconciles them.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.