Decode Your Profit & Loss Statement
Ever clicked into QuickBooks, pulled up the Profit and Loss report… and then just stared at it?
You're not alone.
Understanding a Profit and Loss (P&L) statement can feel a little like cracking a secret code. But once you get the hang of it? Game changer.
Whether you're managing your own books or helping a client, this little report can tell you some much that you need to know about where the money’s going—and why it matters.
Let’s break it all down together.
Watch the video here, or keep reading!
First Things First—Where to Find It
In QuickBooks, head to the Reports tab and click standard reports. You’ll see a few main options:
Profit and Loss
Balance Sheet
Accounts Receivable Aging Summary
Today we’re sticking with the Profit and Loss.
Once you’re there:
Set the date range (try “All Dates” for the most information).
Collapse the rows to get a clean view.
Click into any dollar amount to see the detail behind it.
Quick tip: skip the “Profit and Loss Detail” report unless you really need it. It’s often too much info at once.
You will see that the system is set to either cash or accrual accounting. You can change that if you want. I have a video about Cash Versus Accrual systems that you can watch HERE.
What You're Actually Looking At
The P&L breaks down like this:
Income (aka what you’re earning)
Cost of Goods Sold (what it costs to produce what you're selling)
Expenses (everything else it takes to run your business)
Net Income (what’s left at the bottom)
Let’s use a landscaping business example.
They split their income into:
Design services
Landscaping
Pest control
Product sales
They’re tracking each stream to see what’s actually profitable. Smart.
Even within landscaping, they’re separating job materials and labor—which helps answer questions like:
Are we overpaying on materials?
Are labor costs too high?
This breakdown helps clients make informed decisions. Should they raise prices? Outsource labor? It all starts here.
Understanding Cost of Goods Sold (COGS)
COGS = the costs that go up as you sell more.
If your client runs a bakery, their COGS includes:
Flour, sugar, packaging
The baker’s hourly wage
More loaves = more cost.
On the flip side, operating expenses are often fixed. Think:
Rent
Utilities
Marketing
They don’t shift with how much bread you bake. Understanding this difference helps your client price their product profitably.
Chart of Accounts = The P&L Blueprint
The P&L is only as clear as the Chart of Accounts behind it.
Want better insights? Create categories that make sense for your client’s business.
For one client, I created two main buckets:
Monthly Fixed Expenses
Annual Expenses
Now they can easily spot those big once-a-year costs—and not panic when cash flow dips temporarily.
On the flip side, I have a friend with a very small biz who keeps it ultra simple. She uses just the 10-15 expense categories the IRS asks for. Works great for her.
Moral of the story: your chart of accounts should match the needs of the business. Not the other way around.
I have a free chart of accounts that you can download HERE.
Digging Into Expenses
Flip back to that Profit and Loss report.
Expand the “Expenses” section. Play around with the display—try “by month” or “by year.” This can show you patterns you’d otherwise miss.
Look at:
Trends (utilities jumping suddenly? Might be a miscategorized payment)
Seasonality (do they earn more in summer? Less in January?)
Outliers (random huge expenses that don’t fit the pattern)
Then… sort by total. The highest expenses are usually the most impactful—and where you can often save the most.
5 Red Flags to Watch For
As a bookkeeper, you’re on the front lines. You notice things clients don’t. Here’s what to keep an eye on:
Duplicate expenses – Old subscriptions they forgot about? Sneaky.
Big category jumps – If something doubled from last month, dig in.
Tax payments or transfers miscategorized – Can really throw off totals.
Return on investment – Are those Facebook ads actually converting?
Rising COGS but flat pricing – Might be time to raise rates.
If you see any of these, don’t be afraid to say something. Even a quick email can spark a helpful conversation:
*"Hey, just noticed you’re still paying for two cloud storage services. Do you still use both?"
If you want to learn more about categorizing tough expenses, check THIS VIDEO out.
If you’ve ever felt unsure about reading a Profit and Loss report… I hope this made it a little less intimidating.
Because here’s the thing: you have a valuable perspective.
You're in the books. You see the trends. You can help your client make smarter decisions—not just about taxes, but about their business overall.
And that is powerful!
Are there creative ways you have set up your chart of accounts to help clients understand their business better?
Want more tips like this?
Check out the Beginner Bookkeeping Masterclass or browse more blog posts here.
