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How To Read Your Profit & Loss Report


There are 3 major reports used to determine the financial health of a business. This article will take an in-depth look at one of them.



A Profit and Loss Report, also called a P&L or an Income Statement, is used in business to determine the viability of the company. To put it very simply, it shows the company’s income and expenses and what’s left over after the expenses come out of the income.


P&Ls are usually looked at over a period of a month or months or a full year, though the date parameters can be set to whatever you want. The example given below is for a single month.


As you can see in the image above, the P&L lists out the categories from your Chart of Accounts and gives the amount allocated to each within the date parameters of the report. Deposits or received payments allocated to Services will show up under services. Checks categorized under Advertising will show up under Advertising, etc., etc., etc.


Income Section

The first section of the P&L gives the income. It will list out the income by the types of income on your Chart of Accounts which have been active within the date parameters of the report.


See notation ① on the diagram below.



This business uses services, your company may sell products instead. In whatever way a company makes its money, those categories would go here. Every company, and owner/manager has got their own preferences on how to set up their reports. One company may like to have all services in one category under Services Sold so they can see everything in once place, whereas another might like to see each individual product put into its own category. Whatever the case may be, those are all listed here at the top of the P&L under Income. All the income categories are then added up.


Notation (1a) is a subtotal of the Services parent account and its sub accounts. You can add any number of parent accounts and any number of subs under each. Each parent account plus its subs will be totaled here.


Note that Discounts and Refunds are under Income for this business in notation ②. This reduces the taxable income for the company by the amount of the discounts and refunds given. These can be placed into the Income section and will appear as a negative or they can be categorized as expenses and show up as a positive number. Either way is acceptable and neither one is more beneficial, taxwise. The only difference is owner/manager preference.


Where do you want to see refunds and discounts? Would you rather reduce your income to get an adjusted picture of your sales or would you rather expense them and show a more raw sales figure. The choice is yours.


In notation ③ the Total Income is all types of income totaled together. If you have multiple parent accounts in your income section, this is where they all get totaled together for a Total Income figure.


Gross Profit ④ is the grand total of all income categories.


Expense Section

The next section on the P&L is the Expenses.




The Expense section lists out each expense category which was utilized within the date parameters of the report, in the case of this example, June of 2022.


Where you see subtotals in the P&L is where there are parent and sub accounts. For example, Auto is a parent account with Gas and Maintenance as its subs. Auto is then subtotaled under Total Auto. At the very bottom of this section is a total of all expenses for the time period of the report.


Other Sections

Below income and expenses there may be some Other Income or Other Expenses listed on the P&L. These are usually transactions that do not directly reflect the operations of the business. Examples of these could be government grants which don’t have to be paid back, credit card cash rewards or Ask My Accountant.


NOTE: Ask My Accountant is a temporary account for questions you or your bookkeeper may have. Always, always make sure this category is empty before closing out your year or filing your taxes.


Net Ordinary Income

This is what is left over of your income after expenses are taken out. This is only accounting for Income and Expense, it does not include the Other Income or Other Expense categories.


Net Income

This is a grand total of all income and other income minus all expenses and other expenses. This is your final bottom line.


In Summary

The P&L is great tool in managing your business. It shows you at a glance what you’re earning, what you’re spending and where the money is coming from and going to.


I hope this article has been helpful to you in making the right decisions for your business.


If you have any questions about bookkeeping or are considering hiring a bookkeeper for your business, please feel free to contact us at info@peggysbookkeeping.com.


About the Author I have been doing bookkeeping for about 20 years and concurrently held a position as the head of HR for a small management firm for 14 of those years.


Currently, I am an owner of Peggy’s Bookkeeping Service with my partner and mother, Peggy. Peggy’s Bookkeeping is a small, family-owned bookkeeping service based in Clearwater, FL. You can visit our website at www.peggysbookkeeping.com.


Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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