The two important parts of the financial statement are the Balance Sheet and Profit & Loss account. Without the preparation of these two entities the financial statement cannot be reported, even the readers of the statement are not able to clearly understand the company’s position. Hence, a due regard is to be given by every company in the preparation of the two. However, people don’t understand them very clearly and notice problems in distinguishing the two terms.
Here with this article, the difference between Balance Sheet and Profit & Loss account is presented.
Content: Balance Sheet Vs Profit and Loss Account
|Basis for Comparison||Balance Sheet||Profit and Loss Account|
|Meaning||A statement that shows company's assets, liabilities and equity at a specific date.||Account that shows the company's revenue and expenses over a period of time.|
|What is it?||Statement||Account|
|Represents||.Financial position of the business on a particular date.||Profit earned or loss suffered by business for the accounting period|
|Preparation||Prepared on the last day of financial year.||Prepared for the financial year.|
|Information Disclosed||Assets, liabilities, and capital of shareholders.||Income, expenses, gains and losses.|
|Accounts||Accounts shown in the Balance Sheet do not lose their identity, rather their balance is carry forward to next year as opening balance.||Accounts transferred to Profit and Loss account are closed and cease to exist.|
|Sequence||It is prepared after the preparation of Profit & Loss Account.||It is prepared before the preparation of Balance Sheet.|
Definition of Balance Sheet
A Balance Sheet is a statement that shows the financial position of the entity at a given date. As you have seen that on the top of the Balance Sheet there is, “as at……” written which mentions the particular date at which it is prepared. It has two broad heads which are to be tallied. They are – (1) Assets and (2) Equity and Liabilities.
On the asset side, it displays the firm’s current and non-current assets. Current assets are those assets which can be converted into cash within one year and includes cash in hand, stock, debtors, bills receivables, cash at bank, marketable securities, etc. Non – current assets have two parts: Tangible and Intangible assets. Tangible assets are the physical assets of the company like machinery, building, furniture, land, vehicles, etc. Intangible assets are the non-physical assets of the company i.e. patents, trademark, goodwill, etc.
On the equity and liabilities side, it displays the shareholder’s fund, current and non-current liabilities. Shareholders fund includes the shareholder’s equity and reserves and surplus. Current liabilities are those liabilities which are to be paid within 1 year and includes creditors, bills payable, short term loan, etc. Non – current liabilities are those liabilities which are to be paid after a period and includes long-term borrowings, bonds, etc.
Definition of Profit and Loss Account
Profit and Loss Account also known as an income statement or statement of revenue and expenses. The account represents the financial performance of the entity in a particular period.
First of all the net sales (sales – sales return) is recorded after that the cost of goods sold is deducted, and the result is the gross profit of the entity. Now from this gross profit the office and administration (rent, insurance, printing, and stationery, etc.), selling and distribution (carriage outwards, bad debts, etc.) expenses are reduced which amounts to operating profit.
After arriving at operating profit operating income (rent received, profit from the sale of assets, etc.) are added to it while the operating expenses (interest on loan, loss on sale of assets) are lessened from it which results in the net profit or loss. If the income exceeds expenses it represents net profit while the expenses exceed income it represents a loss.
Key Differences Between Balance Sheet and Profit & Loss Account
- The Balance Sheet is prepared at a particular date, usually the end of the financial year while the Profit and Loss account is prepared for a particular period.
- The Balance Sheet reveals the entity’s financial position, whereas the Profit & Loss account discloses the entity’s financial performance, i.e. profit earned or loss suffered by the business for the accounting period.
- Balance Sheet is a statement of assets and liabilities. In contrast, Profit & Loss Account is an account.
- A Balance Sheet is a gives an overview of assets, equity, and liabilities of the company, but the Profit and Loss account is a depiction of entity’s revenue and expenses.
- Accounts which are transferred to profit and loss account are closed and lose their identity. On the contrary, those accounts which are transferred to Balance sheet do not cease to exist rather their balance is carried forward to the next accounting year and considered as opening balances.
- The Balance sheet is prepared on the basis of the balances transferred from the Profit and Loss account.
The Balance Sheet and Profit & Loss Account has its significance. A Balance Sheet enables the reader of the financial statement to clearly understand the entity’s financial stability, liquidity, and solvency. The Profit and Loss Account is helpful in comparison of the performance of the company. The two terms consist items of different nature, and that is why the chances of getting confused between them are very less.