How to read a profit and loss statement

The profit and loss statement, also called an income statement or P&L, is the report owners look at most and often understand least. This guide walks through it line by line with an example, and the questions it should prompt.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 2 minute read.

Short answer

To read a profit and loss statement, work from the top down: revenue, minus cost of goods sold gives gross profit, minus operating expenses gives operating profit, and after other items and tax you reach net profit. Then compare margins with previous periods. A profit and loss statement shows performance over a period, not cash in the bank.

At a glance

Also called
Income statement, P&L
Covers
A period, such as a month or year
Top line
Revenue
Key margin
Gross profit as a percentage of revenue
Bottom line
Net profit
Not the same as
Cash in the bank
How to read a profit and loss statementSteps: 1. Check revenue; 2. Check gross margin; 3. Scan operating expenses; 4. Compare periods; 5. Ask what changed.THE PROCESS AT A GLANCEHow to read a profit and loss statement1Check revenueIs it growing, andwhich channels orproducts drive it?2Check grossmarginGross profit divided byrevenue3Scan operatingexpensesLook for any linegrowing faster thanrevenue4Compare periodsThis month against lastmonth, and against thesame month last year5Ask what changedEvery big movementshould have anexplanation yourecognizeChecked against official sourcesTax BakersHow to read a profit and loss statementSteps: 1. Check revenue; 2. Check gross margin; 3. Scan operating expenses; 4. Compare periods; 5. Ask what changed.THE PROCESS AT A GLANCEHow to read a profit and lossstatement1Check revenueIs it growing, and which channels orproducts drive it?2Check gross marginGross profit divided by revenue3Scan operating expensesLook for any line growing faster thanrevenue4Compare periodsThis month against last month, and againstthe same month last year5Ask what changedEvery big movement should have anexplanation you recognizeChecked against official sourcesTax Bakers
The process at a glance: 1. Check revenue; 2. Check gross margin; 3. Scan operating expenses; 4. Compare periods; 5. Ask what changed.

How is a P&L laid out?

LineExample, one yearWhat it tells you
Revenue$200,000What you sold, after refunds
Cost of goods sold- $90,000What the products you sold cost you
Gross profit$110,000 (55%)What is left to cover running costs
Operating expenses- $70,000Advertising, fees, software, rent, wages
Operating profit$40,000 (20%)Profit from the business itself
Other income and expenses- $2,000Interest, one-off items
Net profit$38,000 (19%)The bottom line

For a pass-through business, tax is paid by the owners, so the P&L usually stops before income tax. See pass-through taxation.

How do you read it?

  1. Check revenue

    Is it growing, and which channels or products drive it?

  2. Check gross margin

    Gross profit divided by revenue. A falling margin means costs or discounts are eating into sales.

  3. Scan operating expenses

    Look for any line growing faster than revenue.

  4. Compare periods

    This month against last month, and against the same month last year.

  5. Ask what changed

    Every big movement should have an explanation you recognize.

Why is profit not the same as cash?

Because a P&L excludes things that move cash but are not income or expenses, such as loan repayments, owner draws, buying inventory that has not yet sold, and equipment purchases, and on the accrual method it includes income not yet collected. A profitable business can still run short of cash. See cash vs accrual accounting.

The balance sheet shows where the cash went. See how to read a balance sheet.

The full picture is in the cash flow statement explained.

How does the P&L relate to the tax return?

It is the starting point. Tax adjustments then apply, such as the 50% limit on meals, non-deductible entertainment and penalties, and different depreciation. See deductible business expenses.

When can you trust the numbers?

Only when every account is reconciled and transactions are categorized consistently. See how to do a bank reconciliation and how to set up a chart of accounts.

Want a monthly P&L you can use?

We produce your profit and loss statement every month with margins and comparisons, and explain what changed.

Book a call Chat on WhatsApp

Questions people ask

What does a profit and loss statement show?

A business's revenue, costs and profit over a period, such as a month or a year.

What is gross profit?

Revenue minus cost of goods sold. As a percentage of revenue, it is the gross margin.

Why is my profit different from my bank balance?

Because the P&L excludes items like loan repayments, owner draws and unsold inventory purchases, and may include income not yet collected.

Is a P&L the same as an income statement?

Yes. Profit and loss statement, income statement and P&L all refer to the same report.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS Publication 583: Starting a Business and Keeping Records
  2. IRS Publication 334: Tax Guide for Small Business

Rules and fees change. If you are reading this long after September 30, 2026, confirm the figures with the source before you rely on them.

BookkeepingBookkeeping basics for small business ownersBookkeepingCash vs accrual accountingBookkeepingHow to set up a chart of accounts

More in Bookkeeping

Previous in this topicHow to do a bank reconciliationNext in this topicBookkeeping vs accounting vs tax preparation: who does whatTopicAll 30 guides in Bookkeeping

This guide is general information. It is not tax or legal advice for your situation.