Difference Between Profit and Loss Statement and Balance Sheet

If you are the owner of a small business or the financial manager of a company, it is important for
you to be familiar with financial statements and how they are prepared to understand real profit and
loss figures. Profit and loss statement and balance sheet are two of these financial statements.
These are the two most important statements for a business, as they provide information about the
business's annual progress and where it is at a particular point in time.

Both of these statements are prepared for different purposes, and to understand their purpose, let's
look at some basic differences between them. The income statement is also called the profit and loss
account because it represents the net worth of profit and loss, and the new name for the balance
sheet is the statement of financial position.

If a company's income statement shows good profits over several years, it indicates a healthy
balance sheet. But having a healthy balance sheet doesn't necessarily mean a company will also
have a strong income statement. For example, during an accounting period, a company may suffer a
loss, but the company's balance sheet position may not be affected by that loss.

Here are some of the differences between income statement and balance sheet:

Time Periods for Income Statement and Balance Sheet

A profit and loss statement is prepared for a specific accounting period, the length of which varies
from business to business. The annual income statement contains financial information for a full
year, while the quarterly and semi-annual statements contain three- and six-month periods,
respectively. The time period is clearly mentioned at the beginning of the statement.

On the other hand, a balance sheet provides a progress report on a company's financial position at a
specific point in time. A balance sheet is always dated for a specific period and the element values
on that date are accurate for that specific period.

Financial Statement Elements

All income and expenses over a period of time are included in a business' income statement. Income
is credited and expenses are deducted on the statement.
On the other hand, a balance sheet provides a general overview of a business's finances. There are
three reports in the balance sheet, including owner's equity or capital, assets and liabilities. Assets
describe the ownership of a company, liabilities include short-term and long-term debts of the
business, and owner's equity is the value of equity provided by shareholders to meet financial
requirements.

Purpose of Profit and Loss Statement and Balance Sheet

The basic purpose of preparing a profit and loss statement is to determine the profit or loss a
company generates from its business activities. Income and expenses are divided into different
categories, which makes it easier to identify the source of profit and loss. A balance sheet is also
known as a statement of financial position, and its purpose is to provide an overall picture of where
a business is in its financial position.