How to read a profit and loss statement

How to read a profit and loss statement: income minus the cost of what you sold minus expenses is net profit. A simple sample, read line by line.

A profit and loss statement shows what your business earned and what it spent over a period, such as a month or a year. It is also called a P&L or an income statement.

The bottom line tells you if you made money. The lines above it tell you how. Read it from the top down: income, minus the cost of what you sold, minus your other expenses, equals net profit.

The short version

A P&L covers a period of time, such as January 1 to December 31.
Income minus cost of goods sold is gross profit.
Gross profit minus expenses is net profit.
A P&L does not show your cash or your debts. The balance sheet shows those.
Some large money movements, such as owner draws and loans, are not on a P&L.

Words to know

Income: what customers paid you, minus refunds.
Cost of goods sold: the direct cost of what you sold, such as materials or items for resale. Many service businesses have none.
Gross profit: income minus cost of goods sold.
Expenses: the costs of running the business, such as software and insurance.
Net profit: what is left after all expenses. If it is below zero, it is a net loss.
Margin: a profit divided by income, as a percent.

Read the heading first

The heading tells you three things:

Which business. This matters if you have more than one.
Which period. A March P&L and a P&L for January to March are different reports.
Which basis. On the cash basis, income counts when money comes in and expenses count when you pay them. On the accrual basis, they count when earned or owed. See cash vs accrual accounting.

Income

Income is what customers paid you. Show refunds on their own line, so you can see how often work goes wrong. Schedule C does the same: gross receipts on line 1, and returns and allowances on line 2 (IRS).

A loan is not income. Money you put in from your personal account is not income. If either is in income, your profit is too high.

Gross profit

Income minus cost of goods sold is gross profit. For a business that sells products, gross margin shows if your prices cover your costs. You can work it out with our profit margin calculator.

Expenses

Below gross profit are the costs of running the business. Read them from largest to smallest. A 10% saving on a large line is worth more than a small line that goes away.

Look closely at any line called “Uncategorized”, “Other” or “Miscellaneous”. If it is large, your bookkeeping is not finished.

What a P&L leaves out

These are not income or expenses, so they are not on a P&L:

Owner draws: money you take out for yourself.
Money you put in: it is your money, not income.
Loans: borrowing is not income. Repaying the principal is not an expense, but the interest is.
Credit card payments: the purchases were the expenses.
Transfers between your own accounts.
Your federal income tax. The IRS says, “Do not deduct federal income tax” (IRS Publication 334).

This is why a business can show a good profit and still have little cash.

An example

Dana is a freelance photographer who also sells some prints. (She is an example, not a real person.) This is her P&L for 2026, on the cash basis.

Line	Amount
Photography services	$92,400
Refunds to clients	−$1,200
Total income	$91,200
Print production (cost of goods sold)	$3,800
Gross profit	$87,400
Contract labor	$4,800
Travel	$2,100
Payment processing fees	$1,890
Other expenses	$5,920
Total expenses	$14,710
Net profit	$72,690

Her gross margin is $87,400 ÷ $91,200, about 96%. It is high because she mostly sells her time. Her net margin is $72,690 ÷ $91,200, about 80%. This tells her that most of her income will be taxed, so she should set money aside. See how much to set aside for taxes.

Your P&L is not your tax return

Your P&L is where your Schedule C starts. Some items change on the return. For example, the business meals deduction is 50% (IRS), but your P&L shows the full amount you spent. Give your accountant the P&L, and let them make the tax changes. See Schedule C explained.

A tip for Righto users

Righto makes a Profit and Loss report from your categorized transactions. You can also ask your own AI agent, such as Claude Code, which expense grew this quarter. See how agents work with Righto.

Common questions

Is a P&L the same as an income statement? Yes. Profit and loss statement, P&L and income statement are names for the same report.

How often should I read it? Once a month is a good habit, after you categorize and reconcile the month.

Why does my net profit not match my bank balance? The P&L leaves out draws, loans and transfers. Your bank balance also includes money from earlier periods.

What to do now

Check that every account is imported and reconciled for the period.
Run a P&L for this year so far.
Put it next to the same period last year.
For each line that changed a lot, open the transactions and find out why.

Righto is free, easy to use and needs no account.

Sources

Righto gives general information, not tax or legal advice. Ask a tax professional about your business.