What an income statement is

If the balance sheet is a photograph, the income statement — also called the P&L (profit and loss statement) — is the video. It shows what happened over a period (a quarter, a year), not on one specific day: how much the company sold, what it cost to sell it, and what was left over as profit.

It’s a waterfall — revenue at the top, a series of costs subtracted in a specific order, profit at the bottom. Each stopping point along the way tells you something different about the business.

The waterfall

Line What it means
Revenue Total sales
− COGS (Cost of Goods Sold) Cost of the raw material and direct production
= Gross Profit What’s left after direct production costs
− Operating expenses Selling, distribution, salaries, admin
= EBITDA Earnings Before Interest, Tax, Depreciation & Amortisation — profit from core operations, before financing and accounting decisions
− Depreciation The plant wearing out over time, spread across years
= EBIT Earnings Before Interest & Tax — operating profit, after accounting for the plant ageing
− Interest Cost of the company’s debt
= PBT Profit Before Tax
− Tax  
= PAT Profit After Tax — the actual bottom-line number, “net profit”

Each subtraction removes a different kind of cost: first the cost of making the product, then the cost of running the business day-to-day, then the cost of the plant ageing, then the cost of borrowing, then the government’s share. What’s left at each stage is a genuinely different question — “is the product itself profitable?” (gross profit) is not the same question as “is the whole company profitable after everything?” (PAT).

Real companies usually have one more line: other income (interest earned on cash, for example), added in before PBT — so a real company’s PBT can be bigger than EBIT minus interest. Desi Bites has none, which keeps the arithmetic clean.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Say you sell lemonade for ₹20 a glass. The lemons and sugar for each glass cost ₹8, so you keep ₹12 — that’s your gross profit. You also pay your little brother ₹3 a glass to help sell it, which leaves ₹9. If you borrowed money to build the stand, the interest comes out of that ₹9 too. What’s left after every cost is the only number that tells you what you actually get to keep.

Income statement waterfall: revenue reduced step by step down to profit after tax

Desi Bites Foods, FY25 — the fictional case study, drawn to scale from the same figures used in the tables below. Illustration only.

Worked example: Desi Bites Foods, FY25

  ₹ Lakh % of Revenue
Revenue 2,592 100%
COGS 1,607 62.0%
Gross Profit 985 38.0%
Operating expenses 544 21.0%
EBITDA 441 17.0%
Depreciation 115 4.4%
EBIT 326 12.6%
Interest 47 1.8%
PBT 279 10.8%
Tax 70 2.7%
PAT (Net Profit) 209 8.1%

Out of every ₹100 of snacks Desi Bites sells, about ₹38 is left after paying for raw material, but only ₹8 makes it all the way down to actual profit, after running the business, depreciating the plant, paying interest on the loan, and paying tax. Every line in between is a real cost that a headline “revenue grew!” number conveniently skips over.

Full three-year version (FY23–FY25, showing margins improving as the business scales) is on the case study page.

Common mistakes

  • Treating revenue growth as profit growth. A company can grow revenue while margins shrink — meaning it’s making less money per rupee of sales, even as the headline number looks better.
  • Confusing EBITDA with actual profit. EBITDA ignores depreciation, interest, and tax — all real costs. It’s useful for comparing operating performance between companies with different debt loads or accounting choices, but it is not what the company actually keeps.
  • Ignoring where in the waterfall a problem shows up. A company with healthy gross margin but weak PAT margin has a cost, financing, or tax problem below the operating line — a completely different issue than a company whose gross margin itself is thin.
  • Looking at one year in isolation. A single year’s P&L doesn’t tell you whether a margin is stable, improving, or one good year in an otherwise shaky trend — that’s why the case study page shows three years, and we compare prior years where it matters.

Takeaway: an income statement is a waterfall from revenue down to profit, and every subtraction along the way answers a different question — reading only the top line (revenue) or the bottom line (PAT) skips the story of where the money actually went.