Profit and loss statements: A guide for small businesses

Learn the basics of a profit and loss statement, a foundational financial document for independent businesses.

As a creative service-based small business owner, you have multiple moving parts to manage: client outreach, acquisition, progress check-in appointments, and getting paid after the project is done. Without understanding your profit and loss statement (P&L), though, all that activity lacks the financial context needed to make informed decisions.

In this article, you’ll learn what a profit and loss statement is, plus how to use it to make strategic cuts to improve your financial health.

Jump to:

• What’s a profit and loss statement?
• Types of profit and loss statements
• How to interpret a profit and loss statement
• How profit and loss statements fit into financial reporting
• How to create a profit and loss statement
• Example of a profit and loss statement
• FAQs

What’s a profit and loss statement?

A P&L, or income statement, is a financial document that provides a snapshot of a company’s revenue and expenses. Simply put, your P&L shows whether your business is profitable over a specified period of time. 

Typical P&Ls cover a fiscal year. But you can have yours cover a shorter or longer period, depending on your accounting cycle. 

As long as you’re consistent, you can experiment with different ways to itemize your revenue and expenses. For example, you can break down the expenses into four categories:

• Cost of goods sold (COGS): This includes the cost of materials and labor to deliver your service, such as raw materials, direct labor related to producing or selling the goods, or packaging. If a cost isn’t directly linked to a specific item, like utilities or common marketing costs, it’s best to not include it in COGS.
• Operating expenses: Daily expenses unrelated to a specific item fall under this category. These costs support the production and distribution of your goods and services.
• Depreciation and amortization: The gradual “wear and tear” expense associated with owning capital equipment or intangible assets fits in this category. This includes things like software licenses, copyrights for creative small businesses, and any equipment purchased for long-term use. 
• Interest expense: Any interest accrued on an outstanding loan will be included here. 

Itemizing your income is more straightforward:

• Operating income: This is the income created by the business’s core operations before taxes and interests, excluding all non-operating expenses.
• Net income: Also called net profit or the “bottom line,” net income is the final profit after deducting all expenses, including taxes, interest, and non-operating costs.

Types of profit and loss statements

Not every business tracks money the same way—and that’s by design. The way you get paid, how long projects run, and when expenses hit your account all influence how you should measure profitability.

That’s why P&Ls typically fall into two categories: cash and accrual methods. Each offers a different lens on your finances, depending on how your business operates.

Cash profit and loss statement

Also known as the cash accounting method, this statement is the simplest way to account for the cash you receive or pay. When money comes into the business account, you record it as revenue. When you use the money to pay for something, you record it as an expense. 

Because of this method’s simplicity, it’s best suited for independent professionals and small service businesses with straightforward pricing and immediate or short payment cycles.

Accrual profit and loss statement

Instead of recording cash when it lands in your account, the accrual accounting method records revenue as it’s earned, including money to be received in the future. If you use this method, you’ll account for that income when you perform the service or deliver the project, not when the client pays you. Expenses are also recorded when they’re incurred. 

This method is better suited for longer projects, invoices with delayed payment terms, or businesses that have multiple contracts running simultaneously.

How to interpret a profit and loss statement

In addition to tracking the profitability of your business over time, a P&L statement can also help allocate resources and determine how to price your product and services.

Though for many creative small businesses it may seem like a “necessary evil,” a P&L statement does the heavy lifting when you apply for loans or credit lines. A well-structured P&L can also prevent headaches with the IRS during tax season.

How profit and loss statements fit into financial reporting

As part of a broader system, a statement of profit and loss helps service-based business owners evaluate how their work translates into financial performance. Other common financial statements include:

• Balance sheets: Show what your business owns (assets), owes (liabilities), and retains as equity at a specific point in time.
• Cash flow statements: Track how cash moves in and out of your business.
• Statements of changes in equity: Detail changes in ownership equity; typically only relevant for businesses with investors or shareholders.

For most creative service-based small businesses, these additional reports are often limited in value early on. That’s why a profit and loss statement is especially important, as it shows whether your work is financially sustainable. 

How to create a profit and loss statement

There’s no one-size-fits-all approach to creating a P&L, but the easiest way is to list all your revenue at the top of the document, while your expenses appear at the bottom.

Templates and accounting software can generate a P&L in minutes. But knowing what goes into it is what helps you actually understand your numbers and use them to make decisions. 

Before getting started, decide which time period you want your P&L statement to cover. Then, focus on these core components:

1. List your revenue: Include all income earned during the selected period, across every service, project, or product you sold.
2. List your expenses: Group costs into three categories—COGS, operating expenses, and non-operating expenses. For service-based businesses, COGS typically includes the direct costs tied to delivering your work.
3. Figure out your net income: Subtract total expenses from total revenue. The final number shows whether you operated at a profit, a loss, or broke even during that time period.

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Example of a profit and loss statement

To help you get a better feel for the P&L statement format, we’ve created a P&L for a hypothetical small business, Lunar Lens Photography.

Lunar Lens Photography—Profit and Loss Statement (2025)

Category	Amount (USD)
Revenue
Client photography sessions	$72,000
Prints and digital add-ons	$8,000
Total revenue	$80,000
Expenses
Equipment and gear	$6,500
Editing software subscriptions	$1,200
Website and hosting	$900
Marketing and advertising	$3,500
Travel and mileage	$4,000
Insurance	$1,800
Education and workshops	$1,200
Office and admin expenses	$2,100
Total expenses	$21,200
Net profit	$58,800

Create and track profit and loss statements with HoneyBook

HoneyBook is an AI-powered business management system for small businesses and independent professionals who want clearer, more actionable financial insights. By combining payments, invoicing, and financial reporting in one place, it makes tracking your profits and losses simpler and more useful.

With HoneyBook, automations track payments as they’re received, while online invoices let you send branded invoices and streamline follow-ups without extra effort. HoneyBook Finance monitors both income and expenses, integrates with QuickBooks, and even includes a tax hub to help you stay organized year-round. 

Start tracking your finances with less work. See how your profit and loss perform each month inside HoneyBook. Try it for free.

FAQs

What’s the difference between a profit and loss statement and a balance sheet?

A P&L shows how much money a business earned and spent over a period of time, while a balance sheet shows what the business owns and owes at a single point in time. Simply put, a P&L statement measures performance, while a balance sheet shows the company’s financial position.

Is a profit and loss statement the same as an income statement?

Yes, profit and loss statements and income statements are the same financial document. Both summarize a business’s revenue, expenses, and net profit or loss over a specific time period.

Are all businesses required to prepare P&L statements?

Not all businesses are legally required to prepare P&L statements, but most businesses need one for taxes, loans, and financial planning. Even sole proprietors and freelancers benefit from using a P&L statement to track profitability and make informed decisions.

Can I do the profit and loss statement for my business or do I need an accountant?

You can create a profit and loss statement yourself using accounting software or a spreadsheet, especially for a small or service-based business. An accountant may be helpful for complex finances, taxes, or compliance, but working with a professional isn’t required to prepare a basic P&L statement.