What Is the Difference Between a Balance Sheet Versus a Profit and Loss Statement?

The primary components of a company's financial statements are the balance sheet and the profit and loss statement--often called the income statement. It is important to understand the similarities and more important to know the difference. Knowing what these statements represent and why they should be considered together could be valuable to you now and in the future.

Features

The balance sheet and profit and loss statement (P&L), when examined together, show owners, management, auditors, investors and analysts both the condition and operational efficiency of a company. The balance sheet shows the company's assets (cash, buildings, equipment and investments), their liabilities (loans, accounts due and other monies to be paid), and equity (the true value of the company). The P and L displays the results of operations for some time period, showing the income earned, the expenses incurred, and the profit or loss of the company during this time.

Types

The method of accounting used to record transactions results in two different types of presentations for both statements. A cash basis P and L shows only income received, not that which is earned but not yet collected. Expenses are only recorded as they are paid, not as they are incurred. The balance sheet will not show assets or liabilities that are not yet fully acquired or paid for. An accrual P and L displays all income earned, even if not received, and all expenses incurred, even if not yet paid. The balance sheet shows all monies due from others, even if not received, and all monies owed to others, even if not yet paid.

Time Frame

Time frames for these two financial statements are very different. A balance sheet is calculated and shows a company's condition at a point in time. The heading of a balance sheet will state a specific date: As of xx/xx/xxxx. A P and L displays the results of operations over a period of time. A P andL heading will read: For the period xx/xx/xxxx to yy/yy/yyyy.

Considerations

When reading financial statements, consider both the difference in the balance sheet and P and L and, also, the industry the company is in. For example, you read a strong balance sheet, with numerous "hard" assets (land, buildings, equipment) and then read another with modest hard assets, but many "soft" assets (accounts and loans receivable). You might quickly and erroneously assume that one company is better than another. You might also compare two P and L statements with one company showing a profit margin of 14 percent while another indicates net income of only 2 percent. But, suppose the second P and L was a supermarket, where 2 percent net profit is acceptable, but the first is in an industry where 18 percent is the norm. Carefully consider statements as they compare to other similar companies and industry standards.

Effects

Do not just look at a company's balance sheet without looking at the Pand L. Because of the difference in the two statements, they should be analyzed together. A strong P and L combined with a weak balance sheet might indicate short-term success, but potential long-term problems. A strong balance sheet matched with a troubling P and L might show some stability, but weak sales or profits may also indicate poor management, products, pricing or expense controls. Understanding the difference between a balance sheet and a profit and loss Ssatement and how they interrelate will help you to make better management and investment decisions.

Resources

• Guide to understanding financial statements
• More basic differences in financial statements