--- title: "Reading a profit and loss without an accounting background" source: https://www.lskhata.com/blog/reading-a-profit-and-loss category: "Stock & money" language: en published: 2026-08-26 reading_time: 7 min --- # Reading a profit and loss without an accounting background _Four lines, in order, and what each one is actually telling you about the shop — plus the one that is not really profit at all._ ## In short - It is one subtraction, done twice. Sales, minus what the goods cost, minus what the shop costs. - Gross profit tells you about your pricing. Net profit tells you about your overheads. - If it looks better than your bank balance feels, the usual causes are credit given and money drawn out. - Compare against your own last quarter, not against another shop. Only one of those comparisons is meaningful. A profit and loss statement looks like an accounting document and is really just one subtraction, performed twice. Once you see the shape, the rest is reading. _[Figure: Everything that came through the door, then the two things that took most of it away. What survives is at the bottom.]_ ### The four lines | Line | What it is | What it tells you | | --- | --- | --- | | Sales | Everything you sold, whether or not the money has arrived | How busy the shop was. Not how much money you have. | | Cost of goods sold | What you paid for the things you actually sold | The other half of your pricing. Only accurate if cost prices are recorded. | | Gross profit | Sales minus cost of goods | Whether your buying and pricing work. This is the line to watch monthly. | | Net profit | Gross profit minus rent, wages, power, everything else | Whether the shop, as a whole operation, is worth running. | **Cost of goods sold, not cost of goods bought.** This is the detail that confuses people most. If you bought ₹200,000 of stock and sold three quarters of it, the cost line is ₹150,000, not ₹200,000. The rest is still sitting on your shelves as stock — you have converted cash into goods, not spent it. ### Which line to look at when Gross profit is the operational number. If it falls, something in your buying or your pricing has moved: a supplier raised prices and you did not, discounting crept up, or your sales mix shifted towards lower-margin items. All three are things you can act on this week. Net profit is the structural number. If gross profit is steady and net profit is falling, the shop's cost of existing has grown — rent, wages, power, something recurring. Those are slower to change and usually require a bigger decision. ### When the profit does not match the feeling This is the single most common reaction to a first profit and loss report: it says the shop made money, and there is no money. Both facts are usually true at once, and there are three ordinary explanations. - Credit. A sale on udhaar is a sale, and it appears in the report in full. If a large share of the month went out on credit, the profit is real and is currently sitting in other people's houses. - Stock. Money spent on goods you have not sold yet does not appear as a cost, because you still have the goods. A big pre-festival order makes the bank account look alarming while the profit figure stays healthy. - Drawings. Money you took for household spending is not a business expense and never enters this calculation. The profit was made and then withdrawn, which is entirely legitimate and completely invisible here. **Read it next to the outstanding total.** Profit and total outstanding credit, side by side, answer the question the profit figure alone cannot: how much of what I earned this month am I actually holding? That pair is more useful than either number on its own. ### Compare against yourself There is a strong temptation to ask what a normal margin is. It is a difficult question to answer usefully, because the range across trades is enormous and even two shops in the same trade on the same street can differ legitimately. What is always meaningful is your own shop, this quarter against last, with a reason attached to any movement. If gross profit fell two points and you know it was because a supplier raised prices in July, you understand your business. If it fell two points and you have no idea why, that is the thing worth an afternoon. > The report is not a verdict on the shop. It is a list of questions, and the useful ones are the lines that moved. ## Common questions **What is the difference between gross profit and net profit?** Gross profit is sales minus what the goods themselves cost you — it tells you whether your pricing and buying are working. Net profit is what remains after rent, wages, power and everything else the shop costs to run. A shop can have healthy gross profit and no net profit at all, and that combination points at overheads rather than at pricing. **Why does my profit look good when I have no money?** Two usual causes. Sales made on credit count as sales even though the money has not arrived, so a month with a lot of udhaar shows profit you have not received. And money you took out for household use is not a business expense, so it never appears in the calculation — the profit is real, and it has already left. **What is a good profit margin for a shop?** It varies so much by trade that a general figure would be misleading — a grocery counter and a hardware shop have quite different economics. The useful comparison is your own shop over time: this quarter against last quarter, with an explanation for any movement. **Does Khata produce a profit and loss report?** Yes, alongside sales, stock, expenses and party reports. What it needs from you is cost prices on products and expenses actually recorded — the report can only be as honest as what has been entered.