Two Sides of the Same Coin - The P&L and The Balance Sheet
If you are a business professional, you have likely come across the two primary reports used for business management: The Profit and Loss statement (aka the P&L or Income Statement) and the Balance Sheet. Each report on its own provides important information about a company's financial status. These reports together create a comprehensive picture of a company’s financial health. Here are just a few basics:
The Profit & Loss (P&L) is the report that most professionals are familiar with, and the report that business owners & CEOs refer to most frequently. In brief, it calculates a company’s NET INCOME, between two certain dates. It lists all revenue streams, cost of goods sold, and operational expenses. Business owners can use this information to see where their company can decrease costs, and what revenue streams are most profitable. The P&L is an essential tool in getting an overall picture of a company’s daily operations.
The Balance Sheet is often overshadowed by the usefulness of the P&L, but it is equally as important. While the P&L shows the operational activity, the Balance Sheet presents a company’s OVERALL VALUE at a specific point in time. The Balance Sheet lists all of a company’s assets ($$), liabilities (debts), and equity (net worth/income, owner equity, etc) to show the valuation of a company on a specific day. The net income from the P&L factors into the Balance Sheet in the Equity section, so the reports work in conjunction with one another. The Balance Sheet also ADDS CONTEXT to the company's operations. For example, if a company has 1 million dollars in net income (profit) for the year on the P&L, you might be inclined to think the company is vibrant and successful, which may or may not be the case. If you look at the Balance Sheet and see that the company only lists $2000.00 in assets but owes $5 million in business loans, you might begin to think otherwise. That is an exaggerated example, but you get the point. The Balance Sheet helps shed more light on the actual worth of the company.
If you never knew the difference between the two, or never needed to, you do now! The two reports, combined with the Statement of Cash Flow, form the foundational reports from which a company's financials are typically presented.
If you'd like to learn more about financial reports (or accounting in general), follow us on Facebook or Instagram. If you need accounting assistance or training, contact us today.
by Heather Richard