Profit & Loss Statement

If you’ve started your own business, you’ve likely come across two key financial reports: the Balance Sheet and the Profit and Loss Statement (also called the “Income Statement”). Although they might look similar at first glance, they serve different purposes. Let’s break down what each one tells you about your business.

What is a Balance Sheet?

A Balance Sheet provides a snapshot of a company’s financial position at a specific point in time. It shows:

• What the business owns (called “assets”).
  • Examples: Cash in the bank, equipment, inventory, property.
• What the business owes (called “liabilities”).
  • Examples: Loans and vendor bills to be paid.
• The owner’s or shareholders’ share of the business (called “equity” or “owner’s equity”).
  • Essentially, this is what’s left for the owners once all debts are paid.

Why it matters

The Balance Sheet answers questions such as:

• Does the business have enough resources (like cash) to cover what it owes in the near future?
• Is the company primarily funded through owners’ investment, or is it mostly financed by borrowing?

What is a Profit and Loss Statement?

A Profit and Loss Statement (often shortened to P&L) shows how much money a company makes (or loses) over a given period—like a month, quarter, or year. It typically includes:

• Revenue or Sales
  • Money earned from selling products or services.
• Expenses
  • Costs the business pays in order to operate, such as rent, salaries, utilities, and materials.
• Profit (or Loss)
  • If revenue is greater than expenses, the result is profit.
  • If expenses exceed revenue, the result is a loss.

A Profit and Loss Statement shows a summary off all the money that came in and where it was spent. If there’s money left at the end, that’s your profit.

Why it matters

The P&L answers questions such as:

• Is the business making enough sales to cover its expenses?
• How much profit is being made over time?
• Are costs too high?

Key Differences

• Timeframe
  • Balance Sheet: Shows a single date in time, referred to as a “As of Date” (like taking a picture of the company’s finances “As of ” 12/31/24).
  • Profit and Loss Statement: Covers a period (such as January 1 to December 31) and tracks how money flows in and out.
• Purpose
  • Balance Sheet: Focuses on what a company owns and owes, and how much belongs to the owners.
  • Profit and Loss Statement: Focuses on whether the company is making or losing money over a span of time.
• Information Provided
  • Balance Sheet: Good for judging financial stability, liquidity (how easily the company can meet short-term obligations), and overall net worth.
  • Profit and Loss Statement: Good for understanding profitability and cost management.

Why Do Businesses Need Both?

Both statements complement each other, giving a well-rounded picture of the company’s health. For example:

• You could be turning a profit (shown on the Profit and Loss Statement) but still have trouble paying bills on time if your Balance Sheet shows low cash and high debts.
• Or you might have strong assets (like property or equipment on the Balance Sheet) but still lose money each month if expenses consistently exceed sales.

Understanding these two financial reports can help you see both the short-term and long-term status of a business.

If you’re just starting to learn about financial statements, begin with the main elements—assets, liabilities, equity for the Balance Sheet and revenue, expenses, profit/loss for the P&L. As you become comfortable with these basics, you’ll be able to use them to make informed decisions about your business or investments.

Looking to better understand the Balance Sheet? Check out our Beginner’s Guide for a clear and simple explanation. A Beginners Guide to Understanding the Balance Sheet