Accounting
How to read a Profit & Loss statement (for non-accountants)
Your P&L answers one question: did I make money? Here's how to read it top to bottom.
Key takeaways
- ▸ Income − cost of goods = gross profit; minus expenses = net profit.
- ▸ Net profit is the honest number — after rent, salaries and overheads.
- ▸ Profit isn't cash: money can be stuck in receivables or stock.
- ▸ Good software builds your P&L for any period in one click.
The Profit & Loss (P&L) statement has a scary name and a simple job: it tells you whether you made money in a period. You don't need an accounting degree to read it.
Read it top to bottom
- Income (sales): everything you billed in the period.
- Cost of goods sold: what those sales cost you (materials/stock).
- Gross profit: income minus cost of goods — your margin before overheads.
- Expenses: rent, salaries, transport, marketing and so on.
- Net profit: what's left after everything — the real bottom line.
Gross vs net — the bit people miss
Gross profit looks healthy because it's before overheads. Net profit is the honest number — after rent, salaries and the rest. A business can have strong gross profit and still lose money if overheads are too high. If net profit is thin, look at overheads, not just sales.
Profit isn't cash
This trips up everyone: you can be profitable on paper and short on cash, because money is stuck in unpaid customer invoices or in stock. Always read your P&L alongside your receivables and inventory — three numbers that together tell the real story.
What to actually do with it
- Compare this month to last — is the trend up or down?
- Find your biggest expense lines and ask if each earns its place.
- Watch gross margin %; a falling margin is an early warning.
- Pair it with receivables to see why profit and bank balance differ.
Getting it in one click
You shouldn't have to build a P&L by hand. If your sales and expenses are recorded, MGH Books generates it for any period and lets you click any number to see the exact bills behind it — so the report is something you actually use, not just file.