Put simply, a Profit & Loss Statement (also called P&L or Income Statement) is the report that summarizes your business income and expenses.  There are three types of accounts that go on your P&L: Income, Cost of Goods Sold (or COGS), and Expenses.

Income includes:

• Money earned for selling goods or services
• Interest earned or other non-sales income

COGS includes:

• Cost of product you sell
• Labor to produce said products

Expenses include:

• Money spent on operations such as rent, office supplies, etc.
• Expenses do not include asset purchases such as machinery, vehicles, etc.

The P&L tells you the net income (or loss) of your business.  But what else is it used for? Mainly, taxes.  The bottom line on the P&L is the basis for your tax bill to Uncle Sam, so you want to ensure its accuracy.

Being self-employed, you may not have W-2’s to present in application for things such as loans, insurance, or investments, so the P&L tells the potential creditors/investors what your income looks like.

Reviewing the P&L is an important procedure for the business owner as well.  For example, do you have a busy season?  Analyzing the performance during the whole year can help you budget for slow season.