Most owners can tell you their bank balance and not their profit, and treat the two as roughly the same thing. They are not, and the difference is exactly what a P&L exists to show. Here is how to read one without any training.
Line one: revenue
Everything you billed in the period. Note that word — billed, not collected. An invoice you raised and have not been paid for is revenue. This is the first place the statement diverges from your bank account, and the most common source of the feeling that the numbers are lying.
Line two: direct costs
What it cost you to supply what you sold — stock purchased, materials, the freight to get it to you. These move with your sales: sell twice as much, spend roughly twice as much here. If this line does not move with revenue, either your recording is incomplete or something in the business has genuinely changed and is worth understanding.
Line three: everything else
Rent, salaries, electricity, professional fees, marketing. These carry on whether or not you sell anything this month, which is what makes them the dangerous ones. A quiet month does not reduce them.
Line four: what is left
Revenue minus both of the above. This is profit — and it is not the money in your account, because some revenue is still owed to you and some expenses are still owed by you. Both statements are true at once, and a business runs on knowing both.
The two questions worth asking each month
- Did direct costs move in proportion to sales? If not, why not.
- Did the fixed costs change? A new one that appeared and stayed is worth naming out loud.
Why your bank balance disagrees
Because it counts when money moved and the P&L counts when the work happened. Money collected this month for a bill raised two months ago shows in your bank now and in your P&L then. Neither is wrong; they answer different questions. Use the P&L to ask whether the business is working, and the bank balance to ask whether you can pay this week.
One thing this article will not tell you
How any of this is treated for tax. That depends on rules that change and on facts specific to your registration, and the sources for it are the GST portal, the Income Tax department and your accountant — not a software blog. What is written above is bookkeeping, which is the same whatever the rules say.