The profit and loss (P&L) statement, or income statement, reports income earned and expenses incurred over a period and arrives at the net profit or loss. It shows how the business performed, in contrast to the balance sheet, which shows its position at a moment.
A reliable P&L depends on complete books, including cost of goods sold for businesses that hold stock.
Indian practice splits the statement in two stages. The trading account comes first: sales less cost of goods sold — opening stock plus purchases minus closing stock — gives gross profit, the margin earned on trading itself. Below it, indirect incomes and expenses — rent, salaries, interest, depreciation — are set against that margin to reach net profit. The two-stage layout answers separate questions: whether the core trade is profitable, and whether the overheads leave anything after it.
Numbers make it concrete. Sales of ₹10,00,000; opening stock ₹1,00,000, purchases ₹6,00,000, closing stock ₹1,50,000 — cost of goods sold ₹5,50,000, so gross profit is ₹4,50,000. Indirect expenses of ₹3,00,000 leave a net profit of ₹1,50,000. Note what is absent: GST. Tax collected on sales is held for the government and recoverable tax on purchases is an asset, so both stay off the P&L, which shows income and expense net of recoverable GST.
The distortions practitioners correct most often: closing stock ignored or guessed, which swings gross profit directly; capital purchases expensed, understating profit and assets at once; drawings booked as business expenses; and income recognised on receipt rather than accrual, shifting profit between years. A monthly P&L reviewed against expectations catches these while memories are fresh — an annual one merely records the damage.