The Profit & Loss statement (also called the income statement) tells you whether your business made money or lost money over a period. It answers the most fundamental business question: "Are we profitable?"
Total income from selling goods or services before any deductions
Direct costs to produce/purchase what was sold — materials, labor, manufacturing
Revenue minus COGS. Shows how efficiently you produce or source products
Rent, salaries, marketing, utilities, depreciation, insurance, office supplies
Profit from core business operations, before interest and taxes
Loan interest payments and income tax / corporate tax
The bottom line — what the business actually earned after ALL costs
"ABC Trading Co." — For the year ended March 31, 2026:
| Particulars | Amount (₹) |
|---|---|
| Revenue (Sales) | 50,00,000 |
| Less: Cost of Goods Sold | (30,00,000) |
| Gross Profit | 20,00,000 |
| Less: Salaries & Wages | (8,00,000) |
| Less: Rent | (2,40,000) |
| Less: Marketing & Advertising | (1,50,000) |
| Less: Depreciation | (1,00,000) |
| Less: Other Expenses | (1,10,000) |
| Operating Profit (EBIT) | 6,00,000 |
| Less: Interest on Loan | (60,000) |
| Less: Income Tax (25%) | (1,35,000) |
| Net Profit | 4,05,000 |
Example: (₹20L ÷ ₹50L) × 100 = 40%
40% of revenue remains after direct costs. Higher is better — shows pricing power.
Example: (₹6L ÷ ₹50L) × 100 = 12%
12% of revenue remains after all operating costs. Shows operational efficiency.
Example: (₹4.05L ÷ ₹50L) × 100 = 8.1%
8.1% of every rupee earned becomes actual profit. The ultimate profitability metric.
❌ Mixing personal and business expenses
✅ Keep separate bank accounts. Only record genuine business expenses in P&L.
❌ Ignoring depreciation
✅ Depreciation is a real cost — equipment loses value over time. Always include it.
❌ Recognizing revenue too early
✅ Record revenue when goods are delivered or services rendered, not when the order is placed.
❌ Forgetting accrued expenses
✅ Record expenses when incurred, even if not yet paid. Unpaid salaries at month-end are still an expense.
The P&L shows income and expenses over a PERIOD (unlike the balance sheet which is a point-in-time snapshot)
Revenue − COGS = Gross Profit → minus operating expenses = Operating Profit → minus interest & tax = Net Profit
Track three margins: Gross, Operating, and Net — each reveals different efficiency aspects
Compare P&L across months and years to identify trends, seasonal patterns, and cost creep
EBITDA removes non-cash charges, making it useful for comparing businesses with different capital structures