What it means
The income statement shows what a business earned and spent over a stretch of time: a month, a quarter, a year. Revenue sits at the top, costs come off in layers, and what's left at the bottom is net income, or a net loss if costs were bigger. Most founders call it the P&L, short for profit and loss.
It covers a period, where the balance sheet is a snapshot of one date. The March P&L means everything earned and incurred from March 1 to March 31.
Revenue minus cost of revenue, what it costs to deliver what you sold, gives gross profit. Gross profit divided by revenue is gross margin. Subtract operating expenses such as R&D, sales and marketing, and general and administrative to reach operating income. Interest, other income and taxes take you to net income.
Under GAAP the P&L is on an accrual basis. Each line shows what was earned or used up in the period, whatever happened in the bank.
In May, Acme earns $50,000 of subscription revenue. It also gets a $3,000 bill for hosting its production app, still unpaid at month end. The bill goes to cost of revenue with an accounts payable balance against it. With $7,000 of other delivery costs, May's gross profit is $40,000, an 80% gross margin.
Had the hosting bill been coded to operating expenses, gross margin would read 86%. Net income is identical either way. Investors compare gross margin across companies, though, so the coding decides whether that comparison is fair.
Net income flows into equity on the balance sheet and is the first line of the cash flow statement. The P&L's lines come from the chart of accounts, so a muddled chart produces a muddled P&L.
Why it matters. It tells you whether the business makes money. Gross margin and net loss come from it, and it's the first statement an investor opens.
The entry, worked
Acme gets a $3,000 cloud hosting bill for running its production app in May. The bill is unpaid at month end.
| Account | Debit | Credit |
|---|---|---|
| Hosting (cost of revenue) | $3,000.00 | |
| Accounts payable | $3,000.00 | |
| Total | $3,000.00 | $3,000.00 |
Production hosting sits in cost of revenue, so it reduces gross profit instead of hiding in operating expenses.
Common questions
Is net income the same as cash flow?
No. Net income is on an accrual basis, and cash flow is actual cash in and out. The cash flow statement explains the difference.
What goes in cost of revenue for a SaaS company?
Typically what it costs to deliver the service: production hosting, third-party software inside the product, customer support and onboarding. Write the policy down and apply it the same way every month.
Where does EBITDA come from?
It's built from the P&L: net income with interest, taxes, depreciation and amortization added back. GAAP doesn't define it, so it isn't a line on the statement. Label it as a non-GAAP measure and show how you got there.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- P&LPerformance over a periodGlossary
- US GAAP for early-stage startups, in plain EnglishAccrual accounting, revenue recognition (ASC 606), leases (ASC 842), stock compensation and capitalized software: what each means for a small company.Guide · 4 min
- Can you vibe code your startup’s accounting?AI coding tools build a finance dashboard in an afternoon, but not a closed, reconciled, GAAP-basis ledger. Where the line is, and how to stay inside it.Guide · 3 min
- Deferred revenue for SaaS startups, explainedAn annual prepayment is cash today and revenue over a year. How deferred revenue works under ASC 606, why it’s a liability, and the schedule behind it.Guide · 4 min
- How to reconcile Stripe payouts to your booksA Stripe payout is charges less fees, refunds and disputes, batched across days. How to book it gross, tie it to the bank, and keep revenue right.Guide · 4 min
- Burn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.Guide · 3 min
- States without sales tax: the five, and what it meansAlaska, Delaware, Montana, New Hampshire and Oregon have no statewide sales tax. What that means for sellers, local taxes and gross receipts taxes.Guide · 6 min
- How to read an income statement (P&L)Revenue, cost of revenue, gross margin, operating expenses and net income, read line by line, on accrual basis, with the mistakes founders make most.Guide · 7 min
- Cash vs accrual accounting for startups, and the IRS ruleCash or accrual for a startup: why investors and auditors read accrual, when the IRS lets a C-corp file on cash, and the 2026 gross receipts limit.Guide · 5 min
- SaaS revenue recognition under ASC 606, step by stepASC 606’s five steps applied to a startup SaaS contract: annual prepay, implementation fees, usage and multi-year deals, with the entries.Guide · 6 min
- The income statementTwo of the five account types, arranged so each subtotal answers a different question about how the month went.Lesson 10
- The balance sheetThe other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.Lesson 11
- Closing the monthStatements are not the end. The close proves every balance against something outside the ledger, then locks the period so the numbers can't quietly change.Lesson 13
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.