How to Read a Profit and Loss Statement

Beginner: What a P&L Is and What Its Lines Mean

A P&L is a story with a beginning and an end

The statement covers a period of time: a month, a quarter, a year. It starts with the money that came in at the top and works its way down to what you kept at the bottom.

That is why people say top line and bottom line. The top line is revenue, the bottom line is net profit, and every line in between explains what happened to the money on its way down.

The top: revenue

Revenue, sometimes called sales or the top line, is all the money your business brought in during the period, before any costs come out.

Example: in one month you sold 2,000 dollars of candles. That 2,000 sits at the very top. It feels good, and it is not yours yet. The rest of the statement shows how much of it survives.

The middle: cost of goods sold and gross profit

Right under revenue comes cost of goods sold, the direct cost of the things you sold: wax, jars, fees. Subtract it from revenue and you get gross profit.

Example: 2,000 revenue minus 700 cost of goods sold leaves 1,300 gross profit. This line tells you whether the product itself makes money before the rest of the bills show up.

The bottom: expenses and net profit

Below gross profit come your operating expenses: rent, software, ads, your pay. Subtract those and you reach net profit, the bottom line, the money that actually stayed.

Example: 1,300 gross profit minus 900 in expenses leaves 400 net profit. That 400 is the real answer to how did the business do this month, and it is the number that matters most.