Do you know the difference between a Profit and Loss vs Balance Sheet?

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They are both crucial in Finance & Accounting, yet each tell you different information

Let’s start with some definitions…

➡️ What is a Profit & Loss (P&L)?

In plain English, a P&L tells you what you’re net earnings are, which is the sum of what you’re EARNING, less the expenses you’re INCURRING

In accrual based accounting, that’s all dependent on when the events take place...

In cash accounting, that’s all based on when cash comes in vs goes out

➡️ What is a Balance Sheet?

A Balance Sheet tell you the net worth of your business…

Essentially showing you what you OWN (Assets)…

how much of those assets were funded by creditors (Liabilities)...

and how much of those assets were funded by owners / prior earnings (Owners Equity)

🤔 So how do these 2 statements differ from one another?

Well….a P&L is all about helping you understand the net profitability of your business, without any consideration to what possessions you have, and who you owe money to

For that reason, a P&L is run from a specific start date to a specific end date - often times showing YTD, and grouped by month

A Balance Sheet on the other hand primarily communicates your financial position at an EXACT point in time. IE, the balances shown there are cumulative

Taking a look at just your P&L, you may think the business is doing really well in terms of earnings…

But then analyzing your Balance Sheet, you may see that the company has an unsustainable amount of debt that will eventually cripple your organization

🤔 If I had to choose just ONE of these statements to analyze a business, which would it be?

A Balance Sheet

Because a Balance Sheet includes information that comes from your P&L in an account called Retained Earnings…

That’s pretty much the sum of all of your prior net income amounts from your P&L…

You won’t be able to tell the details of what makes up those earnings by just looking at the Balance Sheet...

but you can still get an idea as to what the net earnings each period were

And that was the difference between a Profit and Loss vs Balance Sheet

You might be interested to read more about The difference between the Profit and Loss vs Cash Flows here.