How to read a profit and loss statement

A profit and loss statement (P&L, also called an income statement) shows what your business earned and spent over a period, and what was left. Read it top to bottom: revenue, minus cost of goods sold, gives gross profit; minus operating expenses gives net income, your profit before income tax. The two numbers worth checking first are your gross margin (gross profit as a percentage of revenue) and your net margin (net income as a percentage of revenue), and how both have changed since last year.

A P&L covers a stretch of time, like a month, a quarter or a year. That's different from a balance sheet, which is a snapshot of what you own and owe on one day.

The parts, from top to bottom

Revenue (sales, income)

Everything you billed or sold in the period, before GST/HST. The tax you collect belongs to the CRA, so it isn't revenue. A good P&L splits revenue into a few lines that mean something to you, such as product vs service, or retail vs wholesale.

Cost of goods sold (COGS, cost of sales)

What you spent directly on what you sold: stock you resold, materials that went into jobs, food in a restaurant, subcontractors on a construction job. If you sold nothing, you wouldn't have spent it. A pure service business may have little or none.

Gross profit

Revenue minus cost of goods sold. On Form T2125, sole proprietors report it on line 8519. It tells you how much each sale contributes before overheads. Gross margin = gross profit ÷ revenue.

Operating expenses (overheads)

The costs of running the business whether you sell a lot or a little: rent, wages, insurance, software, phone, advertising, accounting, bank fees, vehicle costs. These are usually listed by account from your chart of accounts.

Depreciation, or capital cost allowance for tax, appears here too. It's the year's share of the cost of equipment, vehicles and computers. See capital cost allowance explained.

Net income (net profit, the bottom line)

Gross profit minus operating expenses. For a corporation, income tax comes off after this to give net income after tax. For a sole proprietor, this is the business income that goes on your personal return, and the income tax is yours, not the business's. Net margin = net income ÷ revenue.

A worked example

A café in Ontario, run as a corporation. Its P&L for the 2026 fiscal year, with the year before for comparison:

	2026	2025
Revenue
Food and drink sales	$312,000	$287,000
Catering	$18,000	$14,000
Total revenue	$330,000	$301,000
Cost of goods sold
Food and beverage purchases	$102,300	$87,600
Cups and packaging	$9,900	$8,700
Total cost of goods sold	$112,200	$96,300
Gross profit	$217,800	$204,700
Gross margin	66.0%	68.0%
Operating expenses
Wages and benefits	$118,500	$112,000
Rent	$36,000	$34,800
Utilities	$7,800	$7,500
Card processing fees	$6,900	$6,300
Repairs and maintenance	$4,200	$2,900
Insurance	$3,600	$3,400
Accounting	$3,000	$2,800
Interest and bank charges	$2,700	$3,100
Advertising	$2,400	$1,500
Software and subscriptions	$1,800	$1,600
Depreciation	$6,000	$5,300
Total operating expenses	$192,900	$181,200
Net income before tax	$24,900	$23,500
Net margin	7.5%	7.8%

The figures are made up for the example, but the layout is the standard one.

Reading it

Start with the bottom line, then look up. Profit rose from $23,500 to $24,900. That looks fine. But revenue rose 9.6%, from $301,000 to $330,000, and profit rose only 6.0%. Something ate part of the growth. Reading up the page tells you what.

Gross margin fell two points, from 68.0% to 66.0%. On $330,000 of sales, two points is $6,600. Food costs went up faster than prices. That's the biggest single thing on this P&L, and it's fixable: a price review, a supplier change, or tighter portioning and less waste.

Wages rose 5.8%, slower than sales. As a share of revenue they fell from 37.2% to 35.9%. The café is getting more out of its staff hours, which is good.

Rent is fixed. It went up $1,200, but as a share of sales it fell from 11.6% to 10.9%. More sales through the same space is how a café grows into its rent.

Repairs jumped 45%, from $2,900 to $4,200. One year isn't a pattern, but if the espresso machine is starting to fail, a replacement belongs in next year's plan.

Advertising rose $900, and catering revenue rose $4,000. That may or may not be connected, but it's the right question to ask.

The overall reading: a healthy café growing at about 10% a year, giving back part of its growth through food costs.

Five questions to ask of any P&L

1. Is revenue up or down, and by how much? Compare to the same period last year, not last month, if the business is seasonal.
2. What's the gross margin, and is it moving? A falling gross margin means costs are rising faster than prices.
3. What are the three biggest expenses as a share of revenue? Those are where a change makes a difference. A 10% saving on software is noise. A 10% saving on food costs is real money.
4. Is any line unusual? A big jump in one expense is usually either a one-off or a bookkeeping error. Find out which.
5. What's the net margin? That's what's left of each dollar of sales. It's what pays the owner, the debt and the taxes, and what's left over grows the business.

What a P&L doesn't show

This is where a P&L confuses people, because the profit on it is rarely the same as the change in your bank balance. These don't appear on a P&L:

• GST/HST. It's collected and paid on the CRA's behalf, so it sits on the balance sheet.
• Loan principal. The interest is an expense; the repayment of the loan itself isn't.
• Equipment purchases. A $12,000 oven doesn't appear as $12,000 in the year you buy it. Only that year's depreciation does.
• Owner's draws and dividends. Taking money out isn't an expense. The CRA says not to deduct drawings paid to yourself. Salary paid through payroll to a corporation's owner is an expense, though. See salary vs dividends.
• Money owed but not yet paid, if the P&L is on the accrual basis. An invoice sent on December 28 is revenue in December even if the cash arrives in January. Cash vs accrual accounting explains the difference.

So the café above made $24,900 of profit, but if it repaid $15,000 of a loan and bought a $12,000 oven, its bank balance went down over the year. Both are true. That's why a business also needs a balance sheet and a cash flow view.

A P&L is only as good as the books behind it

Every number on a P&L is a total of transactions sorted into accounts. If a supplier payment was put in the wrong category, or the owner's grocery run went into expenses, or a month's card statement never got entered, the P&L is wrong in a way that's hard to spot from the summary. Reconciling every account every month (how to reconcile a bank account) is what makes the P&L something you can act on.

For a corporation, the year-end P&L becomes the income statement on the T2, reported in the CRA's GIFI codes. For a sole proprietor, it becomes Form T2125.

Where Spark Books helps

Spark Books keeps the double-entry books a P&L is built from. It sorts each transaction on your uploaded bank and card statements into a Canadian chart of accounts with the GST/HST split out, so tax isn't counted as revenue or expense. Personal spending goes to owner's draw or the shareholder loan, not expenses, and a payment from your chequing account to your card is recorded as a transfer, not spending. At year-end you get one download for your accountant. It's free, with no card.