Income Statement (Profit and Loss Account)

What is the income statement?

Income statement (German: Gewinn- und Verlustrechnung, GuV; also called profit and loss statement or profit and loss account, P&L for short) refers to the comparison of the income and expenses of a financial year. Income is above all revenue; expenses are the consumption of value in the business, for example for salaries, materials, rent and the wear and tear of assets. The balance is the profit of the year (Jahresüberschuss) or the loss (Jahresfehlbetrag). The income statement thus shows by what route a company achieved its result, while the balance sheet depicts assets, equity and debts at a reporting date.

Formula: Net income or net loss for the year = total income − total expenses

Under Section 242 (2) of the German Commercial Code (Handelsgesetzbuch, HGB), every merchant (Kaufmann) draws up an income statement at the end of a financial year; merchant in this sense includes, among others, every GmbH (German limited liability company). Together with the balance sheet, the income statement forms the annual financial statements under the HGB, for which in a GmbH the management is responsible and which are often prepared by the tax adviser. Medium-sized and large corporations have the financial statements, including the income statement, audited. It becomes binding when the shareholders approve it (adoption, Feststellung). In funding rounds and company sales, the income statement is the starting point for key figures such as EBITDA, for the financial model and for the determination of the purchase price.

Structure of the income statement under Section 275 HGB

Corporations such as the GmbH and commercial partnerships with limited liability such as the GmbH & Co. KG structure the income statement under Section 275 HGB in the report form, that is, as a list one below the other with intermediate results. They choose between two equivalent methods. Both lead to the same annual result and differ only in how the operating expenses are classified. The chosen form must be retained; deviations are permissible under Section 265 (1) HGB only in exceptional cases and must be justified in the notes, the explanatory text part of the financial statements.

Total cost method

The total cost method classifies by types of cost, that is, by what the expense was incurred for. In Germany it is widespread because it follows directly from financial accounting.

Structure (simplified): Revenue ± changes in inventories + other own work capitalised + other operating income − cost of materials − personnel expenses − depreciation and amortisation − other operating expenses ± financial result − taxes = net income or net loss for the year

Changes in inventories are the increase or decrease in self-produced, not yet sold products. Own work capitalised means self-created assets such as in-house software, whose costs are carried into the balance sheet. The financial result combines income from investments, interest income and interest expenses.

Cost of sales method

The cost of sales method classifies by functional areas, that is, by the part of the company in which the costs arise. From revenue, the cost of production of the products and services sold is deducted; the result is the gross profit on sales. Selling expenses, general administrative expenses and other operating income and expenses follow. The method is widespread internationally and comes closer to the gross margin as understood in business management. It does, however, require a reliable allocation of costs to the functional areas and, in the notes, supplementary information on cost of materials and personnel expenses, from which small companies are exempt. Many software companies therefore stay with the total cost method in the annual financial statements and report by functional areas only internally.

Relief for smaller companies

Under Section 276 HGB, small and medium-sized corporations may combine several items into a single item “gross result” (Rohergebnis), under the total cost method for example all items from revenue to cost of materials. Revenue and margin are then no longer visible to outsiders. Because the gross result also contains own work capitalised and other income, it is not suitable as a margin.

From the income statement to EBITDA and EBIT

EBIT and EBITDA are not items of the income statement under commercial law but key figures derived from it. EBIT (earnings before interest and taxes) is determined starting from net income for the year. Taxes on income and earnings, in a GmbH corporation tax and trade tax, are added back, and the financial result is eliminated: a negative financial result is added, a positive one deducted. EBITDA (earnings before interest, taxes, depreciation and amortisation) arises when depreciation and amortisation of intangible assets and property, plant and equipment are also added back.

Because the law does not define either key figure, the delimitations differ in practice, for example for other taxes or for the unwinding of the discount on long-term provisions. Where a key figure has legal consequences, for example in loan covenants, an earn-out (the performance-dependent part of the purchase price) or the calculation of the purchase price, the contract therefore defines it precisely. For valuation, EBITDA is adjusted for one-off effects; the result is adjusted EBITDA.

Relationship of the income statement to the balance sheet and cash flow

Income statement and balance sheet are linked through double-entry bookkeeping. Every expense and every item of income has a counter-entry on a balance sheet account: a depreciation charge, for example, simultaneously reduces the carrying amount of the asset written down. The net income or net loss for the year enters the equity of the balance sheet as an item of its own. Ongoing losses therefore consume equity year after year until new capital is injected.

The income statement follows the accrual principle and not the cash flow: income and expenses belong in the year to which they are economically attributable, regardless of when money flows. A software company that is paid for an annual subscription at the start of the term reports the revenue monthly over the term. The part attributable to the period after the reporting date appears as a service still to be rendered on the equity and liabilities side of the balance sheet (deferred income). How much liquidity the business actually generates is shown only by the cash flow statement, from which free cash flow is also derived.

The income statement in due diligence and valuation

In financial due diligence, buyers or investors examine the income statement of the last two to three financial years and of the current year on a monthly basis. The monthly figures are reconciled to the adopted annual financial statements. The focus is on:

• Revenue quality: share of recurring, project-based and one-off revenue, and recognition in the correct period.
• Gross margin: directly attributable costs such as hosting, licences and customer support, and their development over time.
• Special effects: one-off income and expenses, for example grants, income from the release of provisions or transaction costs.
• Own work capitalised: development costs that have been carried into the balance sheet. The personnel expense does appear in the income statement but is offset by income of the same amount and burdens the result only later through amortisation.
• Personnel expenses: market-standard remuneration of shareholder-managing directors and complete recording of bonuses and participation programmes.

The answers determine the sustainable earnings to which a buyer applies its EBITDA multiple, that is, the factor with which it converts earnings into an enterprise value. For growth companies without positive earnings, revenue replaces earnings as the reference figure. The income statement then supplies mainly evidence of margin and cost structure.

Worked example: income statement of a software GmbH

A software GmbH applies the total cost method. Its income statement for the past financial year shows revenue of EUR 6,000,000, other own work capitalised of EUR 300,000 and other operating income of EUR 150,000. Of this, EUR 120,000 comes from a one-off grant. On the expense side there are cost of materials for purchased services of EUR 900,000, personnel expenses of EUR 3,600,000, depreciation and amortisation of EUR 250,000 and other operating expenses of EUR 1,200,000. The financial result consists of EUR 10,000 interest income and EUR 80,000 interest expenses. Taxes on income and earnings amount to EUR 130,000, and no other taxes are incurred.

• Operating income: 6,000,000 + 300,000 + 150,000 = EUR 6,450,000
• Operating expenses before depreciation and amortisation: 900,000 + 3,600,000 + 1,200,000 = EUR 5,700,000
• EBITDA: 6,450,000 minus 5,700,000 = EUR 750,000
• EBIT: 750,000 minus 250,000 depreciation and amortisation = EUR 500,000
• Result before taxes: 500,000 + 10,000 minus 80,000 = EUR 430,000
• Net income for the year: 430,000 minus 130,000 = EUR 300,000
• EBITDA margin: 750,000 / 6,000,000 = 12.5%
• Adjusted EBITDA excluding the one-off grant: 750,000 minus 120,000 = EUR 630,000
• EBITDA additionally excluding own work capitalised: 630,000 minus 300,000 = EUR 330,000, a margin of 330,000 / 6,000,000 = 5.5%

Own work capitalised increases EBITDA by EUR 300,000, although the associated personnel expense was paid out in full. A buyer who strips out the grant and the capitalisation sees, at EUR 330,000, less than half of the reported EBITDA. In a valuation using a multiple, every euro of this difference of EUR 420,000 acts on the purchase price with the factor of the multiple.

Distinctions: income statement, balance sheet, cash flow statement and BWA

• Balance sheet: reporting-date statement of assets and capital. The income statement explains how equity has changed through the result between two balance sheet dates.
• Cash flow statement: shows receipts and payments from operating, investing and financing activities. It is a mandatory component of the financial statements only in consolidated financial statements and for capital-market-oriented companies.
• Business management evaluation (BWA): preliminary income statement from current bookkeeping, usually without complete accruals and deferrals. It does not replace the annual financial statements.

Common mistakes

• Equating revenue with receipts of payment. Revenue arises with the service, not with the payment. Advance payments for subscriptions are spread over the term.
• Allocating direct costs wrongly. If hosting or support costs sit in administrative costs or in general personnel expenses, the gross margin looks better than it is. In due diligence, the allocation is redone.
• Not labelling one-off income. Grants, insurance payments or the release of provisions, without explanation, mask the operating trend.
• Inconsistent key figure definitions. An EBITDA defined differently in the pitch deck than in the financial model reduces the credibility of the entire numerical basis.

Frequently asked questions

Does a GmbH have to publish its income statement?

A small GmbH does not. Small corporations disclose only the balance sheet and notes in the company register (Unternehmensregister); the income statement stays internal. Medium-sized companies publish the income statement and may begin with the gross result, large companies disclose it in full. A GmbH is small if it does not exceed two of the three thresholds of Section 267 (1) HGB. Under the values raised in 2024 (as of 2026), these are EUR 7.5 million balance sheet total, EUR 15 million revenue and 50 employees on annual average.

What is the difference between the income statement and a cash-basis profit calculation?

The income statement follows the accrual principle; the cash-basis profit calculation (Einnahmenüberschussrechnung, EÜR) under Section 4 (3) of the German Income Tax Act (EStG) essentially follows cash flow. Only taxpayers who are neither obliged to keep books nor voluntarily keep books may use the EÜR, for example freelancers and small traders. They submit the EÜR schedule to the tax office. A GmbH is always obliged to keep books and submits balance sheet and income statement as an electronic balance sheet (E-Bilanz).

Why does the monthly evaluation differ from the annual financial statements?

Because closing entries are missing. Current bookkeeping often records provisions, accruals and deferrals, changes in inventories and depreciation during the year only as flat amounts or not at all. A monthly closing with these entries reduces the deviation considerably.

Is a net loss for the year an obstacle to a funding round?

In the growth phase, generally not. Investors check whether the loss arises from planned investments in sales and product and whether gross margin and cost structure show a path to positive results. A loss becomes critical when it consumes equity and the financing of the next months is open.

The Roemer Capital view

In fractional CFO mandates, Roemer Capital first structures the internal income statement so that the cost structure becomes readable: direct costs separate from sales, development and administration, one-off items labelled separately. Monthly reports, financial model and investor documents use the same EBITDA definition. The classification under commercial law remains the task of the tax adviser; Roemer Capital's contribution is the reconciliation between the two views.

Before a funding round or a sale, Roemer Capital reconciles the monthly figures with the adopted annual financial statements before an investor or buyer does. Every difference explained in advance shortens due diligence and takes away the other side's arguments for discounts.