Profit and loss statement and balance sheet are two important components of financial statements. The purpose of both are entirely different from each other. Firs one shows the comprehensive income of an entity and later one shows about the financial position of the entity. The main difference between P&L and balance sheet is that all incomes and expenses are part of the P&L while all assets, liabilities and capital are part of the balance sheet.
Profit and loss, revenue statement, statement of comprehensive income, statement of operations, or operating statement is an financial statements of an entity that shows the revenues/incomes and expenses of an entity during a particular period. It shows the all revenues generates and expenses incurred in a period and there net result in shape of net profit. Every kinds of revenues, incomes, and discount received or other kinds of incomes and every kind of expenses such as depreciation, amortization, taxes, administration expenses, and other write-offs are written in profit and loss statement. It can be prepared via two methods: Single-Step Method and Multi-Step Method. The Single Step income statement takes a simple approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement takes several steps to find the bottom line, starting with the gross profit.
Balance sheet and statement of financial position is a summary of the financial balances of a business partnership and other business organization that is produced as the end of its financial year. It can be best described as the ‘snapshot of a company’s financial condition’. In three basic financial statements – balance sheet, income statement, and statement of cash flows – balance sheet is the only statement that applies to a single point in tine of an entity’s calendar year. It contains three parts: assets, liabilities, and ownership equity/capital. Assets are followed by the liabilities. The differences between assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth equal assets minus liabilities. It is presented with assents in one section and liabilities in the other section with the two sections ‘balancing’.
- P&L has two parts, incomes/revenues and expenses. Balance sheet contains three parts, assets, liabilities, ownership equity/capital.
- P&L is generate to measure the income position of the entity while balance sheet is generate to measure the financial position of an entity.
- Both statements are important for internal and external stakeholders’ point of view but P&L is a matter of concern for management and owners more.
- No head of balance sheet is the part of P&L. However, the net profit of P&L becomes the part of balance sheet and appears in capital/owner’s equity.
- Balance sheet also helps in calculating return on capital employed, return on equity, financial strength and control of working capital while P&L has limited purpose only that is calculation of net income.