Profit and Loss Account and Balance Sheet

Every shareholder, employee, creditor, trader even the Government itself wants to keep updated on every company’s financial conditions. So, the Profit and Loss Account and balance sheet are financial statements the company releases periodically. These statements include a continuous record of companies’ financial stability. Also, the reason behind publishing is, that it is used by market analysts, companies, creditors, and investors to assess the company’s economic status, financial stability, and future of the company. These statements are two of three important statements that the company releases frequently. Another one is called Cash-Flow Statement.

Let’s get a clear picture of what profit and loss account and balance sheet examples mean.

Profit and Loss Account

The profit and loss account is the combo of certain business transactions like sales, income, and expenditures of the organization. A profit and loss account or statement gives a clear picture of a company’s profits and losses in a month or a year. It shows the general public how much the company generated revenue.

Also, another legal job is done through profit and loss, which is if the company is maintaining its statutory obligations. A business has to be maintained in accordance with The Companies Act, The Partnership Act, Patent and Trademark. In this way, anyone can measure the financial performance of a company. A profit and loss account is also known as Profit And Loss Statement. 

Example of Profit and Loss Account

Net Profit or Loss =  Gross Profit or loss + Indirect Income – Indirect Expenses

Top Line and Bottom Line

Profit and Loss statements have Top Line and Bottom Line within them. Topline means the entry of revenue. It subtracts the costs of running a business. Cost of goods, business operational expenses, tax expenses, etc., are included in the Topline. The bottom line is the profit earned by the company, or we can say it’s the net income of the company.

• Revenue and Expenses

Profit and loss statements have companies’ revenue and expense tables. Whenever they are incurred, it’s listed in the sheet of profit and loss.

Balance Sheet

This balance sheet procedure was invented to analyze and evaluate the financial ratio. Companies’ balance sheets contain a company’s assets, equities, and liabilities. It computes rates of return and the capital structure of companies. A balance sheet also shows how these assets are financed by the company.  Profit and loss accounts in the balance sheet also provide fruits to shareholders.

They can show their liabilities issues under debts or by issuing shares. By looking into a company’s balance sheet, any investor or creditor can understand how the management is using its assets or shares for a profit. In simple e terms, we can say it’s a statement that gives a clear picture of companies’ assets and loans. 

Let’s discuss some items which are present on the balance sheet.

• Liabilities

Debts – We all know to run a company, debt is required. Every public company has a large amount of debt hanging on its head. So, by the balance sheet, this debt can be calculated properly. Every equity-the holder must know their company’s debt burden. A company can get debt from banks, insurance companies, or persons. This debt has to be clear, so it can run properly.

Overhead – To run a company, one must do structural expenses like building rent, tax, or other ancillary expenses. The balance sheet also counts all these heads.

Payable – A company has wages and dividends to pay on a regular basis. It’s also on the balance sheet.

• Assets 

Marketable Securities – This means equities and securities of debt a company has. A company has equities that are sellable in the market.

Receivables – To run a company, people provide a lot of money to them. It’s called accounts receivable. 

Cash and Cash equivalent – Company has a large amount of cash and cash equivalent Treasury bills(T-bills) and Certificates of Deposits (CD).

Difference between Profit and Loss account and Balance Sheet

We must know the difference between profit and loss accounts and balance sheets to understand the balance sheet and profit and loss sheet.

1. The balance sheet is made from the balance of profit and loss. At the same time, profit and loss are made based on the company’s income and expenses of the company.
2. The balance sheet provides a clear view of companies’ assets, shares, debentures, liability, etc. But profit and loss show companies’ early profit and loss, which are based on shares and assets.
3. The balance sheet is a financial statement prepared by the company. But profit and loss is an account to show the yearly gains.
4. The balance sheet is prepared at the end of the financial year. At the same time, profits and losses are made for a particular year.
5. The balance sheet gives a clear picture of the company’s economic position. But profit and loss give the income incurred or loss suffered by the company.
6. The balance sheet’s identity is never lost. You will see this year’s balance sheet next year also as the “opening balance”. While accounts that are transferred to profit and loss stop existing.

Conclusion 

The profit and loss account and balance sheet are very crucial topics in business economics. A student who wants to pursue a career in corporate life must know how the company evaluates its cost, income, and profit. A professional who is already pursuing a career in this field must know how to prepare a balance sheet for the company.