What is a profit and loss statement?

A profit and loss statement, also called a P&L or income statement, shows how much money a business earned and spent over a period, and whether the result was a profit or a loss. It starts with revenue at the top, subtracts the cost of goods sold to get gross profit, then subtracts operating expenses to arrive at net profit, the bottom line.

What is the difference between gross profit and net profit?

Gross profit is revenue minus the direct cost of the goods or services you sold, that is, the cost of what you bought or made. Net profit is gross profit minus all the other running costs like rent, salaries, electricity, marketing and interest. Gross profit tells you whether your core buying and selling is sound; net profit tells you whether the whole business made money after every expense.

What counts as COGS for a small business?

Cost of goods sold, or COGS, is the direct cost of what you sold during the period. For a trader it is the purchase cost of the goods sold, calculated as opening stock plus purchases minus closing stock. For a manufacturer it also includes raw material and direct labour. It does not include indirect costs like office rent or the owner's salary, which sit lower down as operating expenses.

How often should I prepare a P&L?

A full-year P&L is needed for tax and, for companies, by law. But looking at a monthly or quarterly P&L is one of the most useful habits an owner can build, because it shows trends early. A margin that slips two months in a row is far easier to fix when you spot it in month two than at year end.

Does the P&L show my cash position?

Not directly. The P&L shows income and expenses on an accrual basis, meaning a sale can appear as revenue even if the customer has not paid yet. That is why a business can show a profit and still be short of cash. To see cash you look at your bank balance and your debtors, which appear on the balance sheet, not the P&L.

Profit and Loss Statement (P&L): Format & Example (2026)

The profit and loss statement answers the question every owner cares about most: did the business make money? It is the second of the two core financial statements, alongside the balance sheet, and it is the one you will look at most often. Where a balance sheet is a snapshot on one date, a P&L covers a stretch of time, a month, a quarter or a full year, and tells you the profit or loss over that stretch. This guide explains what a P&L is, walks through every line from revenue to net profit, gives you a sample format to copy, and shows how the P&L differs from the balance sheet.

What a P&L statement is

A profit and loss statement, also called a P&L or an income statement, lists your income at the top and your costs below, and the difference is your profit or loss for the period. It is built as a simple downward calculation: start with what you sold, take away what it cost you, and keep taking away expenses until you reach the final figure at the bottom, the net profit. Because you read it from top to bottom arriving at that last number, the net profit is often called the bottom line.

The lines of a P&L, from top to bottom

Revenue (sales): The total value of goods or services you sold in the period, before any costs. This is your top line. For most small businesses it is the total of all sale invoices raised.
Cost of goods sold (COGS): The direct cost of what you sold, that is opening stock plus purchases minus closing stock for a trader. This is the money that went out specifically to have those goods to sell.
Gross profit: Revenue minus COGS. This tells you whether your core buying and selling makes money before running costs. If gross profit is thin, no amount of expense control will save the business.
Operating expenses: The costs of running the business that are not tied to a specific sale, such as rent, salaries, electricity, internet, transport, marketing and professional fees.
Net profit: Gross profit minus operating expenses (and interest and tax). This is the bottom line, the money the business actually earned for the owners over the period.

A sample profit and loss statement

Here is a P&L for the same imaginary trading firm, covering the full year to 31 March 2026. Follow the numbers down and you can see profit shrinking at each step as costs are subtracted.

Sharma Traders
Profit and Loss Statement
For the year ended 31 March 2026
(All figures in Rupees)

 Revenue (sales) 42,00,000
 Less: Cost of goods sold
 Opening stock 2,20,000
 Add: Purchases 28,40,000
 Less: Closing stock 2,60,000
 COGS 28,00,000
 -----------
 GROSS PROFIT 14,00,000

 Less: Operating expenses
 Rent 2,40,000
 Salaries 5,10,000
 Electricity 96,000
 Transport 72,000
 Marketing 60,000
 Other expenses 82,000
 Total expenses 10,60,000
 -----------
 Operating profit 3,40,000
 Less: Interest on loan 40,000
 -----------
 NET PROFIT 3,00,000
 ===========

Books that keep themselves

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P&L vs balance sheet

Owners often mix up these two statements, so it helps to see them side by side. They answer different questions and cover different time frames, and you need both to understand a business.

The link in the last row matters. When your P&L ends the year with 3,00,000 of net profit, that profit does not vanish; it is added to retained earnings inside equity on the balance sheet. So the two statements are two views of the same business, one of the year's activity and one of the resulting position. For the companion guide, read our balance sheet guide, and to see how each figure is recorded, read debit and credit basics.

Direct costs versus running costs

A frequent mistake owners make is mixing up direct costs and running costs, which then makes gross profit meaningless. Direct costs are the ones tied to the goods you sold, and they belong in COGS above the gross profit line. Running costs, also called indirect or operating expenses, are the ones you would pay whether or not you made a single sale that month, and they sit below the gross profit line. Rent is a running cost. Purchase of the goods you actually sold is a direct cost. Keep the two apart and your gross profit tells you the truth about your buying and selling.

A few items commonly land in the wrong place. The owner's own salary or drawings should sit in operating expenses (or as drawings, not an expense at all), not in COGS. Freight paid to bring stock in is usually a direct cost, while freight paid to deliver to a customer is a selling expense. GST collected on sales is not revenue, because it is money you hold on behalf of the government and pay onward, so it should never inflate your top line.

Reading your P&L well

A P&L is most useful when you compare it across periods rather than reading one in isolation. Watch your gross margin, that is gross profit as a percentage of revenue, from month to month; a falling margin usually means your purchase costs rose or your selling prices slipped. In the sample above, gross profit of 14,00,000 on revenue of 42,00,000 is a gross margin of one third, and net profit of 3,00,000 is a net margin of a little over seven percent. Tracking those two percentages over time tells you more than the rupee figures alone, because they stay comparable even as sales grow or shrink.

Watch expenses as a share of revenue too, because costs that creep up quietly are what turn a profitable month into a loss. A rise in salaries or rent as a percentage of sales is a signal to act. If your sales invoices and expense records are already captured as you go, pulling a monthly P&L is a matter of a few taps rather than a weekend of adding up slips. A clean invoice format feeds the revenue line directly, and consistent records make the whole statement trustworthy.