Profit and loss statement explained with a worked example for a small business

A profit and loss statement (P&L) shows, for a period such as a month or a financial year, what you sold, what it cost you and what is left. It runs top to bottom: revenue, less cost of goods sold gives gross profit; less operating expenses gives EBITDA; less depreciation, interest and tax gives net profit. Read it line by line and it tells you exactly where the money went, which the bank balance never can.

The structure of a P&L, line by line

Every P&L, from a tea stall to a listed company, follows the same staircase. Each step subtracts one kind of cost and leaves a smaller number with a name.

Two conventions matter. Revenue is shown net of GST, because the tax you collect is not yours. And the P&L covers a period, unlike the balance sheet, which is a snapshot on a date. The year's net profit walks off the bottom of the P&L into the owner's capital on the balance sheet.

A worked P&L: Bengaluru cloud kitchen

Take Arjun, who runs a biryani cloud kitchen from a 600 sq ft unit in Koramangala as a proprietorship. About three-quarters of his orders come through food delivery apps and the rest through his own website and WhatsApp. Here is a typical month, with all figures net of GST.

Walk down the staircase. Arjun sells ₹8 lakh of food a month. It costs him ₹2.8 lakh to cook and pack it, so his gross margin is 65%, which is normal for a kitchen (food cost of 30 to 38% is the usual range). Running the kitchen costs another ₹4.2 lakh, of which the single largest item is not rent or wages but the delivery apps' commission. After that he keeps ₹1 lakh of EBITDA, and after the equipment wears down and the bank takes its interest, ₹75,000 a month, or ₹9,00,000 a year, is the profit before tax.

Where does tax go for a proprietor?

Arjun is a proprietorship, so income tax on his ₹9,00,000 annual profit is his personal liability, not the kitchen's expense. Most CAs show it below net profit, as a drawing. Under the new regime for FY 2026-27 the slab tax on ₹9,00,000 would be ₹30,000 (5% on ₹4,00,000 to ₹8,00,000 plus 10% on the next ₹1,00,000), but the Section 87A rebate makes total income up to ₹12,00,000 tax-free, so his tax is nil, assuming no other income. Had he run the kitchen as a private limited company, the company itself would pay tax at 25% (plus surcharge and cess) on the same profit, and the "tax" line would sit inside the P&L. The structure decision is discussed in proprietorship vs partnership vs LLP vs private limited.

The GST wrinkle for restaurants

Restaurant services carry 5% GST without input tax credit. That means the GST Arjun pays on packaging, LPG, rent and equipment is not recoverable; it is part of his cost, and the figures above include it. For orders through delivery apps, the app itself pays the 5% GST on restaurant services under Section 9(5) of the CGST Act, and Arjun reports those as supplies through an e-commerce operator. For his own website orders he charges 5% and pays it in GSTR-3B. Both streams are shown net of GST in the P&L. If you are on the composition scheme instead, the composition scheme guide explains how the 5% flat rate is a cost.

Margins to watch, and what they mean

A P&L in rupees tells you what happened. The same P&L in percentages tells you whether it should worry you. Three ratios cover most of what a small business owner needs.

Gross margin = Gross profit ÷ Revenue. For Arjun it is 65%. It moves when ingredient prices rise, when portions creep up, when wastage grows or when you discount. A two-point fall in gross margin on ₹96 lakh of annual revenue is ₹1,92,000 gone before you notice. Track this monthly; it is the earliest warning you get. The profit margin calculator and the pricing guide help set prices so the margin holds.

EBITDA margin = EBITDA ÷ Revenue, 12.5% here. This is what lenders and prospective buyers look at, because it strips out the effects of financing and depreciation, which vary between businesses. For cloud kitchens, 10 to 20% is respectable; below 5% means a small shock (a rent hike, a commission increase) tips you into loss.

Net margin = Profit before tax ÷ Revenue, 9.4% here. This is the number that eventually becomes your capital or your drawings.

Beyond these, watch the two or three expense lines that dominate your business. For Arjun those are food cost (35%), commissions (16.5%) and salaries (15%). Every point he shifts from app orders to direct orders saves 22% commission on that revenue; moving ₹1,00,000 a month from apps to his own website would add roughly ₹22,000 a month to EBITDA. That is the kind of decision a P&L makes visible. The break-even analysis guide shows how to find the revenue at which the P&L hits zero.

Monthly P&L versus the annual P&L

The annual P&L for April to March is the formal one. Your CA finalises it, it goes into ITR-3 (or is the basis for checking that presumptive tax is worthwhile), and a bank wants it, usually for two or three years, with any loan application. It includes year-end adjustments that a monthly view skips: closing stock valuation, depreciation at income-tax rates (15% on plant and machinery, 10% on furniture, 40% on computers), provisions for expenses billed after March, and bad debts written off.

The monthly P&L is the management tool. It can be rough: use a standard monthly depreciation figure, estimate closing stock, book rent and salaries as they fall due. Its purpose is to see trends while you can still act. For Arjun, a monthly P&L would show that in the monsoon months app orders rise but so do packaging costs, or that the ₹30,000 marketing spend in a particular month brought ₹40,000 of extra revenue at 65% gross margin (₹26,000), which did not cover its own cost.

Prepare the monthly one in the same format as the annual one so the numbers are comparable. If you only ever see the annual P&L in July when the CA sends it, you are reading last year's news.

Profit is not cash: why the bank balance disagrees

The most common question a CA hears after handing over a P&L is "if I made ₹9 lakh, where is it?" The P&L measures earnings; the bank balance measures cash. They differ for reasons that are all visible on the balance sheet.

Consider Arjun's year. Profit before tax was ₹9,00,000. But:

• He repaid ₹2,40,000 of loan principal. Only the interest (₹1,20,000) was in the P&L; principal is not an expense.
• He bought a ₹3,00,000 blast chiller in October. The P&L took only depreciation on it; the cash left in one go.
• Depreciation of ₹1,80,000 was charged in the P&L but no cash went out for it. (This works in his favour: add it back.)
• He kept a two-week ingredient stock, and by March it was ₹40,000 higher than in April, so that cash is on the shelf.
• The delivery apps settle weekly, so about ₹1,50,000 of March revenue was still with them on 31 March; it is a debtor, not cash.
• He drew ₹4,80,000 during the year for household expenses.

Cash generated is roughly profit + depreciation − loan principal − new equipment − increase in stock − increase in receivables − drawings = 9,00,000 + 1,80,000 − 2,40,000 − 3,00,000 − 40,000 − 1,50,000 − 4,80,000 = a cash decrease of ₹1,30,000 despite a ₹9 lakh profit. Nothing is wrong; the profit went into the chiller, the loan and the household. But if Arjun only watched the bank balance, he would think the business was failing, and if he only watched the P&L he would run out of cash. Read both. The bookkeeping basics guide explains the records that produce both.

Common mistakes on small business P&Ls

Including GST in sales or expenses. Revenue swollen by 5% or 18% GST makes margins look wrong and, worse, makes the P&L disagree with the GST returns. Record everything net of recoverable GST.

No closing stock adjustment. A trader who books all purchases as cost and ignores what is still on the shelf understates profit in growing months and overstates it in shrinking ones. Cost of goods sold is opening stock plus purchases minus closing stock, and the stock valuation has to be done to get it.

Loan EMIs as an expense. Only the interest belongs in the P&L. The principal reduces the loan on the balance sheet. Booking the whole EMI understates profit, and a bank will notice.

Owner's drawings as salary. A proprietor cannot pay themselves a salary; what they take is drawings, which is not an expense. (A partner's salary within the limits of Section 40(b) and a director's salary in a company are expenses.)

Personal expenses inside the business. Household groceries billed with kitchen supplies, the family car's fuel in "delivery". This inflates costs, understates profit, and is exactly what an assessing officer looks for under Section 37.

Forgetting depreciation and interest. A P&L that stops at EBITDA feels great and is not profit. Equipment wears out and loans cost money.

Comparing one month to nothing. A single month's P&L is a number; the same month against the previous three and against last year is information. Keep the format identical so the comparison takes seconds.

How VyaparKit helps

VyaparKit is a toolkit rather than accounting software, so it will not draft your P&L, but it produces the numbers that go into it. Sales invoices give you revenue by month, purchase bills with the ITC flag give you purchases with GST correctly separated, and the stock valuation tool gives you the closing stock figure that turns purchases into cost of goods sold. The profit margin calculator and break-even calculator let you test a price change or a new fixed cost against the margins above before you commit.

Next steps

• Draft last month's P&L in the table format above, net of GST, even if some lines are estimates.
• Work out your gross margin and EBITDA margin and write down the two or three expense lines that dominate.
• Reconcile last year's profit to the change in your bank balance using the list in the "profit is not cash" section.
• Fix the format and repeat it every month by the 10th.
• Read the balance sheet guide to see where the profit ends up.