How to read a profit and loss statement without a finance degree.

The profit and loss statement is the report most owners look at, and the one most owners misread. A busy month can look like a great month. A big equipment purchase can make a profitable year look like a loss. Learning how to read a profit and loss statement properly means you can trust the number at the bottom and see where it came from.

This guide walks through a P&L in layers, uses a worked example from a hypothetical salon, and lists the bookkeeping mistakes that make a P&L lie. It's written for owners in Edmonton and across Canada, with the CRA rules that matter.

1The five layers of a P&L

Every P&L follows the same shape, from the top line down to the bottom line:

• Revenue (sales, income): what you billed or sold in the period, before expenses and excluding GST if you're registered.
• Cost of sales (cost of goods sold): costs that rise directly with each sale. Product, materials, subcontractors, merchant fees for some businesses.
• Gross profit: revenue minus cost of sales. What each sale contributes before overhead.
• Operating expenses: the costs of running the business regardless of sales volume. Rent, software, insurance, phone, admin wages, advertising.
• Net income (net profit): gross profit minus operating expenses. The bottom line.

Some P&Ls add "other income" and "other expenses" below operating income for things like interest earned or a gain on selling equipment. Read those separately, because they aren't part of your day-to-day business.

2How to read a profit and loss statement: a worked example

Say you own a small salon on 124 Street with two employed stylists. Here's your P&L for the year. The numbers are hypothetical.

Here's what an experienced reader takes from it:

Gross margin tells you about pricing

Gross margin is gross profit divided by revenue: $110,000 / $240,000 = 46%. Every $100 of sales leaves $46 to pay the rent and everything else. If colour prices rise and you don't raise your prices, this number drops first.

Look deeper and you'll see retail earns a 50% margin ($30,000 sales, $15,000 cost). Services carry wages and supplies of $115,000 against $210,000 of revenue, a margin of about 45%. Same business, two different engines.

Operating expenses tell you about overhead

Overhead is $60,000, or 25% of revenue. Rent alone is 15%. Overhead doesn't scale with sales, so adding another stylist chair could raise revenue faster than overhead, which is why gross margin and overhead are worth watching side by side.

Net income is not your pay

$50,000 of net income doesn't mean $50,000 is sitting in the bank. If you're a sole proprietor, it's the profit you'll pay tax and CPP on, whatever you withdrew. If you're incorporated, it's profit the corporation pays tax on before anything comes to you as a dividend.

3Where a sale actually lands

A common source of inflated revenue is GST. Say you're GST-registered and a client pays $105 for a $100 cut plus 5% GST. The correct entry splits it:

Only $100 reaches the P&L. The $5 goes to the balance sheet because it's owed to CRA. If your booking app deposits a lump sum and it's all coded to sales, revenue is overstated by about 5% and your GST return won't tie out. Our post on why Square deposits don't match covers the fix.

4Sole proprietor vs corporation: what changes on the P&L

The layers are the same either way, but a few lines behave differently depending on how your business is set up.

• Owner pay. A sole proprietor's P&L has no line for the owner's pay, because draws go to equity. A corporation that pays you a salary through payroll shows it as an expense, along with the employer's share of CPP.
• Income tax. A sole proprietor's income tax is personal and never appears on the business P&L. A corporation may show its own income tax expense at the bottom, usually added by the accountant at year-end.
• Dividends. Never on the P&L. They come out of retained earnings after profit is calculated.

This matters when you compare yourself to another business. A sole proprietor with $90,000 of net income and a corporation with $30,000 of net income after paying its owner a $60,000 salary may be doing equally well. Always check where the owner's pay sits before comparing bottom lines.

Reading the trend, not the month

One month on its own tells you very little. Revenue lands unevenly, a big supply order skews costs, and a quiet August in Edmonton can look alarming in isolation. Read the P&L by month for the last twelve months and ask three questions: is revenue trending up, flat or down; is gross margin holding steady; and is overhead growing faster than revenue? If all three answers are good, a single bad month is noise. If gross margin is sliding three months in a row, it's a pricing or cost problem worth fixing now.

5Common mistakes that make a P&L wrong

• Loan payments coded entirely to expense. Only the interest is an expense. The principal reduces the loan on the balance sheet.
• Equipment expensed in full. A $6,000 chair set or a laptop is generally a capital asset. It goes on the balance sheet and is claimed over time through CCA.
• Owner draws or dividends as expenses. These go to equity. They reduce your cash, not your profit.
• Personal spending in business categories. Groceries in "supplies" inflate expenses and won't survive a CRA review. See personal expenses paid from the business account.
• Transfers between your own accounts as income. Moving money from savings to chequing isn't revenue.
• Everything in "Uncategorized expense" or "Ask my accountant". It hides real trends and usually gets cleaned up in a rush at year-end.
• Lumpy annual costs in one month. A full year of insurance in January makes January look terrible. Prepaid expenses fix the timing.

6Reading your P&L in QuickBooks Online

Go to Reports and open Profit and Loss. Then make it work harder:

• Display columns by month. A single annual column hides seasonality. Twelve columns show your slow months and your spikes.
• Add a % of income column. This turns every line into a percentage so you can see margin and overhead at a glance.
• Compare to the previous year. The comparison option puts last year's same period beside this year's.
• Choose cash or accrual. Accrual counts sales when invoiced and bills when received. Cash counts them when money moves. Accrual gives the truer picture for most growing businesses; see cash vs accrual accounting.
• Click any amount to see every transaction behind it.

7How the P&L connects to your tax return

Your P&L is the starting point for tax. Sole proprietors transfer it onto the T2125, the Statement of Business or Professional Activities, filed with their personal return. Corporations report it on the T2 using GIFI codes, and the accountant reconciles book income to taxable income on a schedule.

That's why the categories in your books matter. If your chart of accounts maps cleanly to CRA's expense lines, year-end is quick. If everything sits in "Other", someone has to rebuild it. Our guide to the chart of accounts for small business in Canada shows a setup that works.

8A monthly P&L review in five steps

Once you can read the P&L, read it next to the balance sheet. Our guide on how to read a balance sheet shows how the two connect through equity.

Plum produces a clean monthly P&L for owners in Edmonton, St. Albert, Spruce Grove and Fort Saskatchewan, with categories your accountant can use as-is. Book a call and we'll show you what yours would look like.

9Questions people ask

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.