# 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.

Published October 27, 2026.

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](https://rightobooks.com/blog/how-to-record-owner-draws-and-contributions/) 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](https://rightobooks.com/blog/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](https://www.irs.gov/instructions/i1040sc)).

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](https://rightobooks.com/tools/profit-margin/).

## 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](https://www.irs.gov/publications/p334)).

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](https://rightobooks.com/blog/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](https://rightobooks.com/blog/business-meals-deduction/) deduction is 50% ([IRS](https://www.irs.gov/instructions/i1040sc)), but your P&L shows the full amount you spent. [Give your accountant](https://rightobooks.com/blog/what-to-give-your-accountant-at-year-end/) the P&L, and let them make the tax changes. See [Schedule C explained](https://rightobooks.com/blog/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](https://rightobooks.com/agents/).

## 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

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

[Righto](https://rightobooks.com/download/) is free, easy to use and needs no account.

## Sources

- [Instructions for Schedule C (Form 1040)](https://www.irs.gov/instructions/i1040sc), IRS
- [Publication 334, Tax Guide for Small Business](https://www.irs.gov/publications/p334), IRS