Balance Sheet vs Profit & Loss Account

Updated: Feb 25



The two important parts of the financial statement are the Balance Sheet and the 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, due regard is to be given by every company in the preparation of the two. However, people don’t understand them very clearly and have problems distinguishing the two terms.

Balance Sheet

  • Meaning: A statement that shows the company's assets, liabilities, and equity at a specific date

  • Time frame: Financial condition on a certain date

  • Type: Statement

  • Information disclosed: Assets, liabilities, and capital of shareholders

  • The sequence of preparation: It is prepared after the preparation of the Profit & Loss Account


Profit & Loss Account

  • Meaning: Account that shows the company's revenue and expenses over a period of time

  • Time frame: Financial changes during the period

  • Type: Account

  • Information disclosed: Income, expenses, gains, and losses

  • The sequence of preparation: It is prepared before the preparation of the Balance Sheet

Key Differences between Balance Sheet and Profit & Loss Account

  1. 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.

  2. The Balance Sheet reveals the entity’s financial position, whereas the Profit and Loss account discloses the entity’s financial performance.

  3. A Balance Sheet gives an overview of the assets, equity, and liabilities of the company, but the Profit and Loss Account is a depiction of the entity’s revenue and expenses.

  4. The significant difference between the two entities are is that the Balance Sheet is a statement while the Profit and Loss account is an account.

  5. The Balance sheet is prepared on the basis of the balances transferred from the Profit and Loss account.


Conclusion

The Balance Sheet and Profit & Loss Account have their 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 to the performance of the company. The two terms consist of items of different nature, and that is why the chances of getting confused between them are very less.


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