The two items concern a company's finances, yet there are important differences between them.
Two of the three financial statements that businesses regularly release are the balance sheet and the profit and loss (P&L) statement.
Creditors, market analysts, and investors use these statements to assess a company's financial stability and growth potential.
They also serve as an ongoing record of the company's financial condition. The cash-flow statement is the third of the financial statements.
Important
The assets, liabilities, and shareholder equity of a corporation are listed on the balance sheet at a certain point in time.
A balance sheet gives creditors and investors a quick overview of how well a company's management manages its resources.
A profit and loss (P&L) statement lists all of the income, outlays, and costs for a certain time period.
A P&L statement reveals whether a business can make money by raising sales, cutting expenses, or doing both.
Balance Sheet
A balance sheet lists a company's assets, liabilities, and shareholder equity at a particular time. It offers a foundation for calculating return rates and analyzing the capital structure of the business. This financial statement gives a quick overview of the assets and liabilities of a company as well as the amount of shareholder investment.
The balance sheet displays a company's resources or assets as well as how those resources are financed, including whether debt is incurred under liabilities or equity is issued and recorded as shareholder equity.
The balance sheet gives creditors and investors a quick overview of how well a company's management manages its resources.
The balance sheet is employed in financial analysis and the computation of financial ratios, just like the other financial statements. Here are a few illustrations of standard balance sheet elements.
Cash and its substitutes. These are the most liquid assets, which might include cash, short-term certificates of deposit (CDs), and Treasury bills (T-bills).
Trading Securities: This category consists of debt and equity securities with a thriving market.
Receivables. This is the amount of money that consumers owe the business; it is also referred to as accounts receivable.
Inventory All the items that are for sale are included in this section.
Debt. This comprises the portion of long-term debt and bank debt that is currently owed.
Overhead. This takes into consideration expenses like rent, taxes, and utility bills.
Payables. This covers both owed wages and dividends.
Shareholder equity, which is calculated as total assets less total liabilities for a corporation, is one of the most well-liked financial indicators used by analysts to evaluate the financial health of a company.
The amount that would be given back to shareholders if all of a company's assets were sold and all of its obligations were paid indicates the company's net value, or shareholder equity.
Owner Equity
One of the most popular financial metrics used by analysts to assess a company's financial health is shareholder equity, which is calculated as total assets minus total liabilities. Shareholder equity is a company's net worth, or the amount that would be given back to investors if all of the company's assets were sold and all of its liabilities were settled.
Retained earnings are the portion of net earnings that are not distributed as dividends but are instead held by the firm to be either reinvested in its core operations or used to settle debt. They are tracked under shareholder equity.
Balance Sheet vs. Trial Balance
It's crucial to understand that the trial balance and the balance sheet are two different things. This report is internal and belongs in the accounting division. While the balance sheet is a financial report sent to investors, lenders, and other departments.
The trial balance is more detailed since it offers financial data at the account level, such as general ledger accounts. The information from the trial balance is eventually used to create the period's financial statements.
The balance sheet, in contrast, adds up various accounts and totals the amount of assets, liabilities, and shareholder equity recorded in the accounting records at a certain point in time. The closing stock value, accumulated income, and unpaid expenses are all included in the balance sheet but not in the trial balance. The balance sheet also needs to follow a standard structure that is outlined in an accounting framework, like the International Financial Reporting Standards (IFRS) or generally accepted accounting standards (GAAP).
Statement of Profit and Loss (P&L)
A P&L statement, also known as the income statement, is a financial statement that lists all of the receipts, payments, and outlays made over a given time period, often a fiscal year or quarter. These documents reveal if a business is capable of making a profit by raising sales, cutting expenses, or doing both. The "statement of profit and loss," the "statement of operations," the "statement of financial results," and the "income and expense statement" are just a few of the many names for the P&L statement.
The P&L statement shows a company's top and bottom lines. The top line, or entry for revenue, is the starting point from which the bottom line, or costs of doing business, are subtracted. These costs include cost of goods sold, operating expenses, tax expenses, interest expenses, and any other costs that are occasionally referred to as "extraordinary" or "one-time" costs. Net income, also known as profit or earnings, is the difference, also known as the bottom line.
Actualized Profits and Loss
By comparing total revenues to total costs and expenses, the P&L statement shows the company's realized profits or losses for the given time period. Over time, it might demonstrate a company's capacity to boost profits through either increased sales or cost-cutting measures.
P&L statements may be released regularly or yearly by companies, usually at the conclusion of their fiscal year. A P&L statement is thoroughly examined by accountants, analysts, and investors who look closely at cash flow and debt financing capacities.
Income and Expense
From an accounting perspective, revenues and expenses are recorded when they are incurred on the P&L statement rather than when money is coming in or going out. The P&L statement, in particular, has the advantage of using operating and nonoperating revenues and expenses as determined by GAAP and the Internal Revenue Service (IRS).
Key point
A P&L statement is concerned with a certain time period, whereas a balance sheet considers a specific point in time.
P&L Statement vs the Balance Sheet
There are significant variations between the balance sheet and the P&L statement, even though they both contain some of the same financial data, such as revenues, expenses, and profits. Here is the key one: While a P&L statement describes a company's revenues, costs, and expenses over a certain time period, a balance sheet reflects the assets, liabilities, and shareholder ownership at a particular point in time.
What Each Statement's Goal Is
The goal for which each document is designed varies only a little. Detailed balance sheets are created to show all assets, liabilities, and long-term investments held by the company. In contrast to an income statement, the balance sheet shows the full worth of long-term investments and loans.
Because the three principal accounts finally equal each other out and balance, the term "balance sheet" was coined.
There is a part in which all assets are mentioned, and their total must equal the total of all liabilities plus shareholder equity.
The P&L statement provides an exact response to the following query: Is the business profitable? While investors and accountants use the P&L statement to assess a company's health and to assess the correctness of financial transactions, a company might evaluate its own statement for useful purposes.
Monitoring financial statements carefully reveals areas where revenue is strong and where expenses are incurred effectively, as well as the contrary. For instance, a business can observe rising sales but declining profitability and look for fresh ways to cut operating expenses.
Revenue versus Total Value
The net income, which indicates whether a corporation is in the black or the red, is displayed in the P&L statement.
The balance sheet displays the overall value of a firm, which is how much it is actually worth. Although both of these are a touch oversimplified, this is frequently how investors and lenders perceive the P&L statement and the balance sheet.
Investors should take caution not to conflate cash flow with earnings or profits, it is crucial to emphasize.
A company may function profitably without creating cash flow or may create cash flow without creating profits.
Methods Used to Calculate the Statements
Accountants must total the company's revenue on one line and all of its expenses on another line in the P&L statement. A profit or loss is produced by deducting the total cost of operations from the total income. There are several calculations on the balance sheet, all of which are representations of the same fundamental formula:
Liabilities+Owner equity=Assets.
Conclusion
The balance sheet and P&L statement can be used in conjunction with other financial papers to evaluate a company's operational effectiveness, year-over-year consistency, and organizational orientation. For this reason, investors and the company's executives carefully review the data provided in each document. Large differences in the annual treatment of either document are frequently regarded as a warning sign, even if the presentation of both statements varies slightly from industry to industry.
The consistency of a company's earnings generation over time is a key factor in determining stock prices and bond valuations. Due of this, every investor should be interested in all of a company's financial documents, including the P&L statement and the balance sheet. These financial statements should be examined collectively first, and then with those of other businesses in the sector to establish performance standards and identify any potential market trends.
