How to read a profit and loss statement

What a P&L tells you, and what it doesn't

The P&L (also called the income statement) covers a period — a month, a quarter or a year. It answers one question: did the business earn more than it spent to earn it?

It does not tell you how much cash you have. A sale on 60 days' credit shows as income today even though the money comes later. For that gap, read cash vs profit. It also does not show what you own or owe; that is the balance sheet.

A worked example: a small electrical goods distributor

Here is a simplified yearly P&L in the layout Tally uses, condensed into one column.

Reading it line by line

Sales

Sales should be net of returns and discounts given on the bill, and exclude GST — GST you collect is not your income. If sales look high compared with your GSTR-1, check for unposted credit notes.

Cost of goods sold

Tally works it out as opening stock plus purchases (and direct expenses like freight inward) minus closing stock. This is why a wrong closing stock figure makes the whole P&L wrong. Overstate closing stock by ₹5,00,000 and profit goes up by ₹5,00,000 on paper.

Gross profit

₹28,80,000 on ₹1,80,00,000 of sales is a 16% gross margin. This number is your pricing power. If it drops from last year, look at purchase rates, schemes passed on to dealers, and discounting.

Indirect expenses

Group them into people, premises, delivery, finance and other. Ask of each: did it grow faster than sales?

Net profit

₹7,60,000 is about 4.2% of sales. Income tax is then calculated on taxable profit, which can differ from book profit after your CA's adjustments.

Five questions to ask every time you read a P&L

1. Is this period comparable? Compare April–September this year with April–September last year, not with the full year.
2. Did gross margin hold? A one-point fall on ₹1.8 crore of sales is ₹1,80,000 of profit.
3. Which expense grew fastest? Freight and interest often creep up unnoticed.
4. Is closing stock real? If the stock figure is an estimate, the profit is an estimate too.
5. Are all bills in? A missing ₹2,00,000 purchase bill inflates profit by the same amount.

Turning the P&L into a monthly habit

A yearly P&L arrives too late to change anything. A monthly one, read in fifteen minutes, lets you act while the year is still open. A simple routine:

• Week one of the month: make sure all purchase bills and expense vouchers for the previous month are in Tally.
• Update closing stock from the stock summary, or at least note that monthly profit is before stock adjustment.
• Compare three columns: this month, the same month last year, and the year so far. Festive months and slow months only make sense against their own history.
• Write down one action. For example: freight is up from 1.4% to 1.9% of sales, so review delivery routes; or gross margin fell on one brand, so check the last two purchase rates.

Over a year, these notes become the best briefing you can give your CA before finalising accounts.

Common traps for owners

• Monthly P&L without monthly stock. If you do not update closing stock each month, monthly profit swings wildly. Use a stock valuation from Tally, or treat monthly figures as indicative.
• Personal expenses in business books. They lower profit and confuse analysis. Book them to drawings.
• GST in sales or purchases. If tax ledgers are not set up properly, GST amounts can end up inside sales or purchases and distort margin.
• Ignoring the trend. One P&L tells you little. Three years side by side tells you where the business is going.

Reading your P&L with Tally and Cashflow OS

Cashflow OS shows the Profit & Loss synced from your Tally company on the phone and the web app. Pick any financial year or a custom date range — even one that spans several financial years — to compare periods. The Home screen shows sales, purchases, receipts and payments against the previous period, and the expenses report helps you see which heads are growing. You can export the P&L to Excel or PDF to send to your CA or partner. Details are on financial reports.