Read the statement from top to bottom
A profit and loss statement, or P&L, shows revenue, the costs of operating and the result for a period. Separate sales, cost of sales, operating costs and finance costs. The bottom line is not necessarily taxable income, and it is not the bank balance.
First check the period, reporting basis and VAT
- Is it a monthly, annual or year-to-date statement? Is it final, or are records still missing?
- Is it prepared on a cash or accrual basis? The appropriate basis depends on the applicable rules and activity; it is not simply an option to choose whichever reports less profit.
- Check VAT treatment. Our example is an Israeli VAT-registered dealer, using figures excluding recoverable VAT. Treatment may differ for an osek patur or non-recoverable input VAT.
A fictional shop’s annual statement
Assume accrual accounts with the necessary period adjustments and sales of NIS 600,000. Opening inventory is NIS 40,000, purchases NIS 300,000 and closing inventory NIS 60,000. With no other inventory movements, cost of sales is NIS 280,000: 40,000 + 300,000 − 60,000. Purchases are not necessarily all expensed in that year when goods remain in stock.
| Statement line | How to read it | Amount |
|---|---|---|
| Sales revenue | Revenue recognised for the period | NIS 600,000 |
| Cost of sales | Opening inventory + purchases − closing inventory | (NIS 280,000) |
| Gross profit | Sales less cost of sales | NIS 320,000 |
| Rent | Cost allocated to the period | (NIS 72,000) |
| Payroll and related costs | Total cost in this example | (NIS 120,000) |
| Other operating costs | Grouped costs in the example | (NIS 36,000) |
| Depreciation | Assumed illustrative amount, not a recommended tax rate | (NIS 12,000) |
| Operating profit | After operating costs, before finance costs | NIS 80,000 |
| Finance costs | Interest and financing costs assumed here | (NIS 8,000) |
| Profit before tax | 80,000 − 8,000 | NIS 72,000 |
Three useful lessons from the example
- Gross profit is not the owner’s available money. The NIS 320,000 must also cover rent, payroll and other costs. The illustrative gross margin is about 53.3%: 320,000 divided by 600,000. It is not an industry benchmark.
- Investigate what changed. If gross margin falls, ask about selling prices, product mix, supplier costs and the inventory count. Do not immediately conclude that all operating spending is excessive.
- Compare like periods. Use comparable periods and classifications, and separate one-off items from recurring costs. Missing records or outdated inventory can distort the result.
Why NIS 72,000 profit is not the tax bill
Tax is not one fixed percentage of the bottom line. For illustration, assume NIS 6,000 of the recorded expenses is not tax-deductible and there are no other adjustments. Adjusted business income would be NIS 78,000: 72,000 + 6,000. That is still not the tax payable: other income, deductions, credits and personal circumstances affect the calculation.
The Tax Authority’s Form 1320 illustrates the separation of income, expenses and tax adjustments. Its presentation is not necessarily identical to a management P&L. The linked official form is for tax year 2025; it explains the structure and is not a form for filing 2026 income.
What does the profit figure leave out?
Loan principal repayments are different from interest expense, and an owner’s drawings do not automatically become a business expense. Buying equipment is not necessarily a full running expense on the purchase date. Check the proper treatment rather than classify every bank outflow as an expense.
Collecting an old customer debt, for example, can increase the bank balance without recognising the same accrual revenue again. For the separate cash-flow explanation, read profit versus cash flow ↗.
Four questions to ask your accountant
- Does the statement include all records and the inventory and depreciation adjustments?
- What explains gross-margin changes against a comparable period?
- Which expenses need tax adjustments, and what is the adjusted income?
- What single management action should we examine next, and when will we review it?
Prepare for that discussion with the monthly document checklist ↗, deductible expense guide ↗ and monthly business review ↗.
Official sources and review date
- Official 2025 Form 1320 — income, costs and adjustments ↗
- Official 2025 individual annual return service — schedules and depreciation forms ↗
Checked 28 October 2026. The examples are fictional and arithmetic was checked. Recheck in January 2027, before publication and whenever official instructions change; there is no automatic update.