What is a Profit & Loss Account?


A Profit & Loss Account (P&L) shows whether a profit or loss has been made on the sales income of an organisation after deducting costs. Therefore, it shows the financial performance of a company.

It is important to note that the P&L does not care when cash is paid or received. When a sales invoice has been raised, this is shown in the Sales line of the P&L. However, the money for that invoice is received 30 days later (if the customer is not late in paying!) assuming typical terms and conditions in the UK. Similarly, when a purchase invoice is received from a supplier and entered onto the accounting system, this then shows as a cost in the P&L, even though it may take 30 days to physically pay this invoice.

Why is this distinction so important? Because a company can look profitable but may not have any cash in the bank and therefore go bust. A business could have raised lots of sales invoices, look really profitable but simply not be receiving the money in a timely manner from its customers. That’s why it is critical to not just read the P&L in isolation of the other primary financial statements – the cash flow statement and the balance sheet.

A very simple Profit & Loss Account would look like this:

P&L Category Amount £’000s Notes
Sales / Income 100 Sales invoices raised (NOT cash!!!)
Less: Direct Costs (40) Costs directly linked to the sales made
Gross Profit  60 Sales less direct costs
Add: Other Income 5 Income that isn’t the main trade of the business, e.g. your company sells business cards (main trade) but also rents office space (Other Income)
Less: Overheads (50) All the costs of the business incurred regardless of whether make any sales, e.g. salaries, rent, etc.
Pre-Tax Profit 15 Profit or loss made on sales after all above costs taken into account


It is worth noting that not everything a company spends its money on is shown in the Profit & Loss Account! Assets that an organisation buys, such as motor vehicles, IT hardware and software and office furniture all appear on the Balance Sheet – more on that in a future blog.

As long as you remember that the Profit & Loss Account is NOT cash, then you will be reading and interpreting it better than most!


Interested in becoming more financially savvy?

To find out more, please click here

Contact andi@andilonnen.co.uk for more details or call 07921 252758.  We look forward to hearing from you!