Profit and loss statement

What it tells you

A profit and loss statement summarizes income and expenses for a period. The basic relationship is revenue minus expenses equals net income or loss.

It answers a performance question: did the business earn a profit during the selected period? It does not show the complete cash position or everything the business owns and owes.

Read it from top to bottom

1. Revenue records income generated during the period under the accounting method used for the report.
2. Cost of goods sold captures costs directly associated with the goods or services sold.
3. Gross profit is revenue minus cost of goods sold.
4. Operating expenses cover costs such as payroll, rent, software, and marketing.
5. Net income is the remaining profit or loss after the included expenses.

When it is useful

Use a P&L to compare periods, understand margin changes, identify fast-growing expense categories, and prepare an operating-performance explanation.

What to verify first

Confirm the accounting method, report period, comparison period, and whether unusual or one-time transactions are included. A variance can be mathematically correct while still needing context from the underlying transactions.

Common mistake

Profit is not the same as cash. Revenue or expenses may be recognized before the related cash is collected or paid. Review the cash-flow statement and balance sheet when liquidity is part of the question.