Profit and loss account

Also called P&L, Income statement

The report that shows what you earned and what you spent over a period, ending in the profit figure.

What it means

A profit and loss account covers a period — a month, a quarter, a year — and works down from sales, through cost of sales to gross profit, through overheads to operating profit, and then through interest and tax to the bottom line.

It is a film, not a photograph. The balance sheet is the photograph.

Why it matters

It is the report that answers "did we make money, and where did it go?" and it is the one most owners can read once somebody has walked them down it.

It is also what a lender, an investor or a buyer looks at first, usually three years of it side by side, looking for the trend rather than the number.

What it looks like in practice

Read it in the order it is written and ask one question per line: is that number what I expected? The value is entirely in the surprises.

Compare it to the same month last year rather than to last month — most businesses are seasonal and month-on-month comparisons mostly measure the calendar.

What to watch out for

Accruals. The P&L records income when it is earned and costs when they are incurred, not when cash moves — see accruals. This is why it can show a profit in a month you had no money.

Director's pay and dividends being handled differently from year to year, which makes a trend look like something it is not.

Where to get proper advice

Your accountant produces one at least annually. Ask for monthly management accounts if you do not get them — for most businesses this is affordable and it is the difference between steering and reviewing.