How to Read Your Profit & Loss Statement
Category: Accounting | Published: 30 September 2026 | Last Updated: 30 September 2026
Your Profit & Loss statement shows whether the business made money. Learn what each section means — revenue, gross profit, expenses and net profit — and what to look for.
The Profit & Loss statement (P&L), also called the income statement, shows how much your business earned and spent over a period — a month, a quarter or a year — and whether it made a profit.
The Main Parts of a Profit & Loss Statement
1. Revenue (Sales)
The income from your main business activity, usually shown without GST. Look at the trend: is it growing, stable or falling compared with previous periods?
2. Cost of Goods Sold (Direct Costs)
Costs directly linked to what you sell — purchases of goods, raw material, freight inward, direct labour. For traders it is usually opening stock + purchases − closing stock.
3. Gross Profit
Revenue minus cost of goods sold. The gross profit margin (gross profit ÷ revenue × 100) shows how much you keep from each rupee of sales before overheads.
4. Operating Expenses (Indirect Costs)
Rent, salaries, electricity, telephone, marketing, professional fees, depreciation and other running costs.
5. Other Income
Income outside the main business, such as bank interest.
6. Net Profit
What remains after all expenses. Net profit before tax is the starting point for calculating income tax.
A Simple Example
Sales: ₹10,00,000
Cost of goods sold: ₹6,50,000
Gross profit: ₹3,50,000 (35% margin)
Operating expenses: ₹2,20,000
Other income: ₹10,000
Net profit: ₹1,40,000
These figures are for illustration only.
What to Look For
Margins over time: a falling gross margin may mean rising costs or lower selling prices.
Large or unusual expenses: check whether they are correct and correctly classified.
Expenses growing faster than sales.
Profit vs cash: a profitable business can still be short of cash if customers pay late.
P&L vs Balance Sheet
The P&L covers a period and shows performance. The Balance Sheet is a snapshot on one date and shows assets, liabilities and capital. You need both for a full picture.
Frequently Asked Questions
How often should I review my P&L?
Monthly is ideal. It helps you spot problems early instead of at year end.
Why is my profit different from my bank balance?
Because of credit sales and purchases, loan repayments, capital introduced or withdrawn, and asset purchases, which affect cash differently from profit.
Need accurate monthly reports? See our Accounting & Bookkeeping services.
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Disclaimer: This article is general information and not professional advice for your specific situation.