If you’ve ever opened your Income Statement or Profit & Loss (P&L) report and wondered, “What am I looking at? How do I know if something is wrong?”, you’re not alone.

Most small business owners are handed financial reports with no explanation. And without context, it’s almost impossible to know whether the numbers make sense or whether important mistakes are hiding in plain sight.

In this step-by-step guide, we’ll walk through how to review your Income Statement in QuickBooks Online (though the principles apply to any accounting software), how to spot common errors, and how to ask the right questions so you can confidently understand your financial story.

Income Statement vs. Profit & Loss: What’s the Difference?

A quick note before we begin:

Many accounting professionals call it an Income Statement.

QuickBooks Online calls it a Profit & Loss Statement.

They are the same report, just with different names.

Why Income Statement Mistakes Matter

Your Income Statement shows:

• How much revenue you earn
• How much it costs to deliver your products or services
• How much you spend on operating expenses
• How profit moves month-to-month
  

When amounts are miscategorized (or when the report is shown only as a single total) it is almost impossible to evaluate the health of your business. Errors in your P&L can affect:

✔ taxes

✔ cash flow

✔ pricing decisions

✔ budgeting

✔ and your ability to pay yourself

Understanding how to review this report is one of the most valuable skills you can build as a business owner.

Step 1: Always Display Your Income Statement by Month

One of the biggest mistakes business owners make is reviewing the P&L as a single total.

When you switch the report to display columns by month, everything changes. Suddenly, you can see patterns, trends, and red flags.

Inside QuickBooks Online, go to:

Display ➝ Columns ➝ Months

This makes it easy to answer questions like:

• Was this a slow month or a busy one?
• Did I invoice late?
• Why did one month spike or dip?
• Do these numbers reflect my actual business activity?
  

Monthly columns allow you to “feel the story” behind the numbers, which is critical for spotting mistakes.

Step 2: Review Your Income Section for Out-of-Place Items

Your Income section should include only your operating revenue—what you earn from selling your products or services.

Common mistake to look for:

‍Non-operating income showing up as sales

Examples:

• Bank interest
• Refunds
• Investment income
  

These should be moved to the Other Income section so you can clearly see what your business actually earned through operations.

Even small incorrect amounts can distort your numbers and make the P&L harder to interpret.

Step 3: Look Closely at Your Cost of Goods Sold (COGS)

This is one of the most common problem areas.

Cost of Goods Sold should include all costs required to create or deliver your product or service. Examples:

✔ Raw materials

✔ Inventory purchases

✔ Freight or shipping

✔ Direct labour

✔ Job materials

✔ Subcontractors directly delivering services

A common mistake is leaving these costs inside Operating Expenses instead of COGS.

If job materials or job expenses appear in operating expenses, they almost certainly belong in COGS.

Why this matters:

COGS determines your Gross Profit, and your Gross Profit drives your ability to operate, price correctly, and stay profitable.

Step 4: Analyze Your Gross Profit and Gross Margin

QuickBooks Online makes it easy to see your Gross Profit, but to understand performance, you must also calculate your Gross Margin:

Gross Margin % = Gross Profit ÷ Income

This percentage tells you how efficiently you’re producing and delivering what you sell.

If your margin changes dramatically from one month to the next, it may indicate:

⚠ miscategorized expenses

⚠ price increases from suppliers

⚠ errors in invoicing

⚠ missing expenses

⚠ operational inefficiencies

Monitoring gross margin monthly helps you catch issues early—before they turn into lost profit.

Step 5: Review Your Operating Expenses for Fluctuations

Operating expenses should generally be stable month-to-month.

If a number jumps unexpectedly, ask:

• Was this an annual bill (like insurance)?
• Should this amount be allocated across the year?
• Did something get coded incorrectly?
• Is this a new asset that should be capitalized instead of expensed?
  

🚩 Common red flags:

• Insurance showing as a single large charge instead of being allocated monthly
• Bank charges or interest coded incorrectly
• Large “uncategorized expense” entries
• Costs that should be in COGS instead
  

Your operating expenses tell you how much it costs to “keep the lights on.” They need to be accurate.

Step 6: Understand Operating Income vs. Net Income

After Gross Profit and Operating Expenses, you’ll see:

• Operating Income
• Other Income & Expenses (interest, taxes, depreciation, amortization)
• Net Income (bottom line)
  

Operating Income is similar to EBITDA (earnings before interest, tax, depreciation, and amortization) and shows what your business earns from operations alone.

Understanding this helps you separate operational performance from financing decisions.

Step 7: Compare Your Results to Last Year

One of the most overlooked steps:

Compare your current results to the prior year.

This helps you spot:

✔ changes in margins

✔ increased operating costs

✔ revenue trends

✔ potential pricing issues

✔ cost increases from suppliers

Without comparisons, your numbers have nothing to anchor to.

What If Your Reports Aren’t Helpful? Ask for Better Ones.

If you’re receiving reports with no explanations, no comparisons, and no context—it’s not your fault if they’re hard to understand.

You can request:

• P&L by month
• P&L vs. last year
• P&L vs. budget
• A breakdown of COGS
• A categorized expense review
• A comparison of margins over time
  

It’s your accountant or bookkeeper’s job to provide useful, understandable information.

Download the Month-End Checklist

Make sure you’re reviewing complete and accurate numbers each month: https://learn.mycloudbookkeeping.org/small-business-month-end-checklist

Helpful QuickBooks Resources

Compare QuickBooks Online plans: https://www.mycloudbookkeeping.org/quickbooks-plan-comparison

Book a consultation or get help setting up or reviewing your file: https://www.mycloudbookkeeping.org/consultation

Hi, Kerry here from My Cloud Bookkeeping. I work with small businesses and entrepreneurs to help them manage their business finances in QuickBooks Online.

You may or may not be using QuickBooks Online, and this video is for anybody who’s given an income statement or a profit and loss statement and thinks, “What am I looking at? Would I know if there are mistakes? Where do I even start?”

If something didn’t look right, would you know? Do you know what questions to ask?

So often business owners are presented with reports and it’s very difficult to know exactly what you’re looking at. Today we’re going to look over an income statement together, and I’ll help you understand what you’re seeing — and how to identify when something doesn’t look right.

Let’s also clear something up. Quite a few years back, the accounting community started calling the profit and loss statement the income statement. Accounting software generally — and QuickBooks Online in particular — still calls this report the profit and loss statement. I’m not going to get into a discussion about which is correct or why. Just know that if you’re presented with either, they are the same thing. I hope that helps.

Be sure to stay right to the end — we’ll talk about requesting the information you need if you’re not being provided with it. But first, let’s take a look at how to find mistakes.

Here we are looking at a Profit and Loss statement in QuickBooks Online. It really doesn’t matter that it’s QuickBooks — this could be in any software, or something you’ve created in Excel. But since I’m using QuickBooks here, we’ll take advantage of its functionality.

When we look at this report as a total, it doesn’t really say a lot. It’s a pile of numbers with nothing to relate it to. So the first thing I always do when working with a client is display the report by month.

Once we display the columns by month, we can start to see a picture: July, August, September, October… and in this sample company, part of November. Looking at this month by month paints a story of the business. Most business owners can look at this and immediately recognize what happened in each month — whether it was slow, busy, delayed invoicing, or anything else that makes sense to them.

When you’re looking at your own numbers, ask: Why is it different? What happened that month? Does this look right?

Now, I can see straight away that the income section — our operating income — has little amounts for interest earned mixed into it. These should not be showing up here. That needs to be fixed. Interest income belongs in “Other Income.” We want to see exactly what revenue came from running the business, so we’ll move those.

Next, we scroll to Cost of Goods Sold (COGS). The purpose of this section is to show what it cost to deliver your services or products. Here, we have almost nothing — which is a mistake I see often. If you scroll further down, you can see job expenses and job materials in operating expenses. These most likely belong in COGS. If they’re in the wrong place, you’re not getting an accurate gross profit.

So those items need to be moved.

Now onto Operating Expenses. These should generally be similar each month. When we look across, I can see something odd in October — large “Maintenance” and a big “Insurance” expense of $4,800. Insurance for the year shouldn’t appear all at once as an operating expense. It should be allocated over twelve months using “Prepaid Expenses.” Your bookkeeper or accountant can do this monthly or annually. It’s not an October-only cost.

You’ll also see fluctuations like automobile expenses being higher in a busy month, which makes sense.

I’ll step away and make these adjustments, then come back to review the corrected report.

Now I’m back, and after making those changes, we can see income at the top and proper costs to deliver services in COGS, which gives us a more realistic gross profit. This is so important for understanding your business.

I’ve also exported the report into Excel so we can clearly calculate Gross Margin. This number is incredibly important. Different industries have different normal margins, but whatever “normal” is for you, you need to track it. Sudden changes in margin can indicate accounting mistakes, rising costs, or operational issues.

Once we get past gross profit, we scroll into operating expenses again. These are the fixed costs of running your business — rent, insurance, utilities. These shouldn’t fluctuate greatly month to month. If they do, investigate whether something was coded incorrectly or should be allocated.

I also noticed an “Uncategorized Expense,” which is always a mistake. Clicking in, it was bank charges — so that should be moved to the correct category. You may also see odd entries like negative amounts; with your own business, you’ll know whether those make sense.

After operating expenses, you’ll see Operating Income, which is similar to EBITDA — earnings before interest, taxes, depreciation, and amortization. These “other” items appear below operating profit because they relate more to financing the business than running it.

At the bottom, we then arrive at Net Income — your “bottom line.” This is often close to your taxable income (though adjustments are common).

Once you sort through your Income Statement and find the mistakes, you can manage your business and your cash flow much more effectively.

It is always easier to understand numbers when you have something to compare them to. Another useful comparison is the prior year. Once you’ve reviewed your numbers month by month, compare the current period to last year. You’ll quickly see whether your gross margin is on track and whether operating expenses have changed significantly.

If you’re given a report that shows only totals without context, you can ask for it in a different format. This doesn’t mean you don’t understand — it means you know what information you actually need. When you look at your numbers regularly, it becomes easy to notice when something isn’t correct.

Remember, it really is your bookkeeper or accountant’s job to give you useful information. Many business owners feel embarrassed about not understanding their reports — but the reality is that they’ve never been given reports they can understand.

I look forward to hearing how much more useful your reports are now that you know what to look for. If you’re not receiving financial reports regularly — and in a format you can review — ask for them. After the month-end reconciliations and balance sheet review, these reports should be provided to you.

If you’d like to know whether QuickBooks Online is right for your business, I have a plan comparison below. And feel free to book a time to chat if you’d like help getting set up — it’s what I do.

You can also download my Month-End Checklist below, and check out my videos on the balance sheet. Soon, you’ll be ready to manage your business finances and make timely decisions.

Small business is the backbone of our economy. You employ many people and play an important role in your community. If there’s any way I can help you be more successful, please reach out.

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