Balance Sheet Vs Profit Loss Account
by Yuvi K - October 26, 2023
Balance Sheet vs Profit & Loss Account: What’s the Difference?
Are you a new business owner and don’t know what the difference between a Balance Sheet and a Profit & Loss Account (P&L) is? It’s not uncommon to get confused about these financial statements, considering they are very closely linked.
To understand the difference, let’s first have a closer look at each document.
What is a Balance Sheet?
A Balance Sheet (बैलेंस शीट) is a financial statement that outlines a business’ assets, liabilities, and equity. It shows the overall financial health of a business, at a specific point in time.
When preparing a Balance Sheet, you compare a company’s liabilities and assets in order to calculate its net worth. Your net worth is your total assets minus your total liabilities. This figure reflects your business’ equity – its owners’ stake in the business.
What is a Profit & Loss Account?
A Profit & Loss Account (निवेश और हानि खाता) records the revenue and costs incurred by a business during a particular period. It shows the profit made or loss incurred during the timeframe.
Understanding the two documents together is crucial as they provide insights into a business’ finances. A balance sheet, for instance, can help you determine assets for sale to generate profit. Your Profit & Loss, on the other hand, measures success in your core activities.
The Difference Between a Balance Sheet and a Profit & Loss Account
While both documents provide insights into a business’ finances, they go about in different ways. As stated earlier, a Balance Sheet provides a snapshot of your business at a given point in time. A Profit & Loss Account, on the other hand, records the inflow and outflow of a business over a duration of time – usually a single month, though periods as long as a year are not uncommon.
Equity in a Balance Sheet reflects the owners’ stake in the business, whereas Profit & Loss Account tells you how much money is being made.
Using a Balance Sheet and Profit & Loss Account Together
Both documents should be used together. As an example, if your Profit & Loss Account records income, you can reflect that in your Balance Sheet by increasing an asset such as cash.
On the other hand, if your Profit & Loss Account shows you have had to make a payment you may need to decrease an asset such as cash.
Understanding a business’ finances consists of far more than just understanding its Balance Sheet and Profit & Loss Account. It’s important to monitor these documents regularly, however, to get a firm grasp of the business’ overall financial health.
