The profit and loss statement and the balance sheet are two important components of financials. The purpose of both are completely different from each other. The first shows the comprehensive income of an entity and the next shows the financial situation of the entity. The main difference between P&L and the balance sheet is that all income and expenses are part of the P&L while all assets, liabilities, and equity are part of the balance sheet.
Profit and loss statement, income statement, statement of comprehensive income, statement of operations, or statement of operations is a financial statement of an entity that shows the income/revenues and expenses of an entity for a particular period . It shows all revenue generated and expenses incurred in a period and the net result in the form of net profit. All types of income, income and discounts received or other types of income and all types of expenses, such as depreciation, amortization, taxes, administration expenses and other write-offs, are recorded in the income statement. It can be prepared by two methods: single-step method and multi-step method. The one-step income statement has a simple approach,
The balance sheet and statement of financial position is a summary of the financial balances of a business corporation and other business organization that is produced at the end of its financial year. It can best be described as a “snapshot of a company’s financial situation.” In three basic financial statements – balance sheet, income statement and statement of cash flows – the balance sheet is the only statement that applies to a single point in an entity’s calendar year. It contains three parts: assets, liabilities, and equity capital/ownership capital. Assets are followed by liabilities. The differences between the assets and the liabilities are known as the net worth or the net assets or the net worth or capital of the company and according to the accounting equation, the net worth equals assets minus liabilities.
- P&L has two parts, income/revenue and expense. The balance sheet contains three parts, assets, liabilities, equity/equity.
- P&L is generated to measure the income position of the entity while the balance sheet is generated to measure the financial position of an entity.
- Both statements are important from the point of view of internal and external stakeholders, but profit and loss are a matter of concern for management and owners more.
- No chief balance sheet is part of P&L. However, the P&L net profit becomes part of the balance sheet and appears in owner’s equity/equity.
- The balance sheet also helps to calculate return on capital employed, return on capital, financial strength and working capital control, while profit and loss only has a limited purpose which is the calculation of net income.