Balance sheet vs. profit and loss statement: What’s the difference?

When looking at your financial statements, there are three main types that you will issue on a regular basis: the balance sheet, the profit and loss (P&L) statement, and the cash flow statement. 

Of these three statements, two are commonly confused: the balance sheet vs. P&L statement. So what are the differences and similarities you should look out for and how can each statement contribute to your company's financials?

• Overview: Balance sheet vs. P&L statement 
• What is a balance sheet?
• What’s included on a balance sheet?
• Balance sheet example
• What is a profit and loss statement?
• What’s included in a profit and loss statement?
• Profit and loss statement example
• When to use a balance sheet and profit and loss statement
• Main balance sheet and P&L statement differences
• The order in which they are prepared
• The information they contain
• Insight into the company’s financial position
• When the statements are created

Overview: Balance sheet vs. P&L statement

The balance sheet and P&L statement hold similar financial information; however, there are differences to consider. The main difference is that the balance sheet yields information regarding a company’s assets, liabilities, and shareholders’ equity, while the profit and loss statement summarizes information about revenues, and expenses.

What is a balance sheet?

A balance sheet is a financial statement that reports on a company’s assets, liabilities, and shareholders’ equity. It is used to gather information across a set financial reporting period—for example, on a monthly, quarterly, or yearly basis. 

The balance sheet is also known as the statement of financial position since it summarizes a business’s finances. This includes:

• The company’s total revenue since its inception
• Total acquired debt
• Comparison of assets and liabilities 

What’s included on a balance sheet? 

A balance sheet includes three factors used to determine the net worth of a business: assets, liabilities, and shareholders' equity. 

• Assets: Assets can be thought of as what you own and can include property, equipment, or cash on hand. Basically, it’s anything that has value to your company. 
• Liabilities: Also known as what you owe, liabilities can be represented by debt, accounts payable, or money owed to suppliers. Liabilities are something your company is liable to pay to someone else. 
• Shareholders’ equity: This metric is calculated by subtracting liabilities from assets. It’s a representation of what would be given to shareholders if the business was liquidated, assets were sold, and all debt was paid. 

Balance sheet example

To start you off on the right foot here’s a basic example of a balance sheet as well as a template to reference. The template includes a spreadsheet where you can tailor the rows and columns to your needs, such as adding new accounts and changing titles.

What is a profit and loss statement? 

Profit and loss statements are another one of the three main financial statements. They include the summary of revenue, expenses, and total cost of production. The P&L statement offers insight into a company’s capacity to produce more revenue by either reducing costs or increasing sales prices.

What's included in a profit and loss statement?

A company’s P&L statement shows multiple factors of production over a set period of time—generally by month, quarter, or year, depending on your accounting structure. Unlike a balance sheet, a profit and loss statement includes several more categories. These include:

• Revenue from sales
• Cost of goods sold
• Marketing and advertising expenses
• Taxes
• Selling, general, and administrative expenses
• Interest expenses
• Net income
• Research and development expenses

Profit and loss statement example

In the image above, we can see that all of the sales revenue, expenses, and taxes are listed, equalling the net income for the year. This will later coincide with the balance sheet you previously created in that the net income will appear in the retained earnings line item on the balance sheet.

When to use a balance sheet and profit and loss statement

A balance sheet and P&L statement can and should be used in different scenarios, depending on the financial period and the need to understand your company’s financial position. For example, here are a few instances in which a balance sheet and P&L are necessary:

1. Closing of a financial period: The three financial statements, including the balance sheet and P&L, should be drawn up at the end of your financial period (every month or quarter) depending on when you close your books. 
2. At the end of an operating cycle: Balance sheets and P&Ls are often prepared again at year-end or the end of a full operating cycle. 
3. Investor inquiry: To get a full scope of your company’s financial situation, an investor will likely ask to see your balance sheet as well as your other financial statements.

Main balance sheet and P&L statement differences and similarities

However similar the balance sheet and P&L statement may seem, there are several key differences that separate them, including:

• The order in which they are prepared
• The information they contain
• What they reveal about a company’s position
• When they are drawn up

The order in which they are prepared

The three financial statements work coherently together to create a fully holistic view of the company and its financial position. They have to be prepared in a particular order since the information from one affects the others. The order goes like this:

1. The profit and loss statement: All income and expenses are added together to gather the net income, which reports as retained earnings. 
2. The balance sheet: That net income becomes a retained earnings line item on the balance sheet, which is used to locate the ending cash balance.
3. Cash flow statement: The cash balance from the balance sheet then appears on the cash flow statement.

The information they contain 

As we mentioned earlier, the balance sheet and profit and loss statement yield very different information. One contains what belongs to the company, while the other shows how earnings were spent. The categories are broken out this way:

• Balance sheet:
• Accounts payable
• Loans
• Variable debts
• Assets
• Dividends

• The profit and loss statement:
• Admin expenses
• Cost of goods sold
• Research and development
• Total revenue

Insight into the company’s financial position

Say someone is interested in investing in your company and is curious about how the company is being run. A serious potential investor would likely ask to see your company’s financials to ensure the investment is a smart financial decision. Here’s what they’d gather from looking at each statement:

• Balance sheet: They could gather how company revenue has grown in the past as well as what assets the company currently possesses and what debt has been incurred. They could piece together your company’s financial position based on the liquidity of the business as it is. 
• Profit and loss statement: They could figure out your company’s ability to increase profits based on growth in sales as opposed to your cost of production. They could gauge your company’s overall financial performance.

When the statements are created

Statement creation largely depends on your accounting period, as well as if you are seeking investors or creating a financial forecast to present. While these statements can both be drawn up at any time if your books are in the proper order, it’s more beneficial to wait until the end of a period for a full view. This is when each statement is traditionally drawn up:

1. At the end of the accounting period (usually monthly or quarterly)
2. At the end of the fiscal year
3. When a company is being audited

Making statements to boost your business

Now that you have a firm understanding of the differences between the balance sheet and the profit and loss statement, what’s next? If you don’t have a strong accounting system in place already, forming these statements can prove to be a challenge. Using powerful accounting software like QuickBooks can lessen your burden on bookkeeping, creating your balance sheet, and locating your assets and liabilities.