Balance Sheet vs Profit and Loss
The profit and loss statements of a company and the balance sheet must be prepared in order to arrive at a clear picture of the company’s financial stability. It is vital to note that the two refer to very different statements of financial information, with significant differences in the data recorded in each. However, the two are related to in each other in that the balances recorded in the balance sheet are directly affected by changes in the financial information recorded in the profit and loss statement. The following article provides the reader a clear understanding of the differences between the two statements, in terms of what information they portray regarding the firm and differences in the data that are recorded under each statement.
What is a Balance Sheet?
The balance sheet of a company includes vital information regarding the company’s fixed and current assets (such as equipment, cash, and accounts receivable), short term and long-term liabilities (accounts payable and bank loans) and capital (shareholder’s equity). The balance sheet is prepared, on a specific date, hence the words ‘as at’ at the top of the sheet. For example, if I am writing up a balance sheet for the 30th of October 2011, I would write ‘as at 30th October 2011’ on the heading of the statement, to show that the information represented in the balance sheet is a snapshot of the firm’s financial situation at that date. Balance sheets will provide information on how a company achieves its financing needs, using more debt or capital, and can serve as an indicator of precaution if the firm is obtaining excessive loans beyond their ability to repay.
What is Profit and Loss?
The profit and loss statement is a statement showing the firm’s financial performance and shows information on the different transactions and activities, expenses, income and profit that has been paid off and earned. The profit and loss shows the ongoing financial data and entries that arise from business operations throughout the financial period. The profit and loss records data regarding expenses that have already been paid and income that has already been received. The profits recorded show the surplus income that the firm has earned once the expenses have been paid. The profit and loss statement is useful in terms that it allows the investor to obtain a clear picture regarding the firm’s revenue levels, costs and changes in profitability throughout the years.
What is the difference between Balance Sheet and Profit and Loss?
Both the profit and loss statement and balance sheet are providers of financial information regarding the firm, even though there are significant differences in each. The main difference between the two lies in the timing in which they are prepared. The profit and loss is an ongoing record of a business’s financial activities, and the balance sheet is a snapshot at the year end of the firm’s financial situation. In that sense, the profit and loss is a statement of financial performance and the balance sheet is a statement of financial position. The information in a balance sheet how firm is mostly financed; either through more debt or capital, and the data in the profit and loss shows the financial performance of the firm in terms of revenue, costs and profitability.
Balance Sheet vs Profit and Loss
• The balance sheet is a statement of financial position, whereas the profit and loss is a statement of financial performance.
• The main difference between the two is the time frame in which each is prepared. The profit and loss statement is an ongoing recording of the business’ revenues, expenses and end of period profit. The balance sheet, on the other hand, is a portrayal of the firm’s financial situation as at the date in which it is prepared, which is usually the year-end.
• The data recorded in a balance sheet and in a profit and loss are different. Profit and loss records incomes, expenses and profits. A balance sheet records the assets, liabilities, and the capital.
• It is essential that both the profit and loss statement and the balance sheet are examined together in order to get a clear picture of the firm’s financial standing.