How to Read a Profit and Loss Statement
A profit and loss statement (P&L, or income statement) shows what a business earned and spent over a period: revenue at the top, minus cost of goods sold for gross profit, minus operating expenses for operating income, and net income at the bottom. Read it top to bottom, then compare each line with the prior month, the same month last year and your budget.
By SF Business Solutions · Our team includes one licensed CPA · 2 sources · Updated September 10, 2026
Line by line, with an example
The figures below are an illustrative example for one month, not a real client.
| Line | Example | What it tells you |
|---|---|---|
| Revenue | $120,000 | Sales for the period, after refunds and discounts |
| Cost of goods sold | ($54,000) | Direct costs of what you sold: materials, freight, direct labor |
| Gross profit | $66,000 | What is left to pay for everything else: a 55% gross margin |
| Operating expenses | ($48,000) | Rent, salaries, software, marketing, insurance |
| Operating income | $18,000 | Profit from running the business |
| Other income and expense | ($1,200) | Interest and one-off gains or losses |
| Net income | $16,800 | The bottom line for the period |
Three ratios worth checking every month
Ratios turn the P&L into something you can compare month to month, whatever your revenue did:
- Gross margin = gross profit ÷ revenue. In the example, $66,000 ÷ $120,000 = 55%.
- Operating margin = operating income ÷ revenue. In the example, $18,000 ÷ $120,000 = 15%.
- Net margin = net income ÷ revenue. In the example, $16,800 ÷ $120,000 = 14%.
What a P&L doesn't show
Profit is not cash. Loan principal payments, owner draws, inventory purchases and money customers still owe you all change your bank balance without appearing on the P&L. That is why the balance sheet and the cash flow statement come with it: the balance sheet shows what you own and owe on the last day, and the cash flow statement explains why cash moved.
The accounting method matters too. A cash-basis P&L records income and expenses when money moves; an accrual P&L records them when they are earned or incurred, which usually gives a truer picture of a single month.
Questions to ask your bookkeeper
A few questions tell you whether the P&L in front of you can be trusted:
- Are all bank, card and loan accounts reconciled for this month?
- Is anything sitting in uncategorized or suspense accounts?
- Is this cash basis or accrual?
- What changed most from last month, and why?
- Are owner draws kept out of expenses?
Getting a P&L you can trust
SF Business Solutions sends a profit and loss statement, a balance sheet and a cash flow statement every month, after every account is reconciled. Books are closed between the 5th and 15th of the following month, depending on when documents arrive, and monthly bookkeeping starts at $250 a month. At year end, the same team prepares and files your tax return.
Is a profit and loss statement the same as an income statement?
Yes. P&L, income statement and statement of operations are names for the same report.
Why does my P&L show a profit when my bank balance went down?
Profit and cash move differently. Loan principal, owner draws, inventory purchases and unpaid customer invoices affect cash but not profit; the cash flow statement shows where the difference went.
How often should I look at my P&L?
Monthly, once the books are closed and reconciled, compared with last month, the same month last year and your budget.
What is a good gross margin?
It varies widely by industry, so compare against your own history and your industry's benchmarks rather than a single number.
What is the difference between a cash and an accrual P&L?
A cash-basis P&L records income and expenses when money moves; an accrual P&L records them when they are earned or incurred.
What is the difference between gross profit and net income?
Gross profit is revenue minus the cost of goods sold, before any overhead. Net income is what remains after every expense, including operating costs, interest and taxes, which is why it is called the bottom line.
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