The balance sheet and profit and loss statement are two important pieces of financial documentation for a business.
The balance sheet shows a company's assets, liabilities, and shareholders' equity at a specific point in time.
The profit and loss statement shows how much money a company has earned or lost over a specific period of time.
There are several key differences between the balance sheet and the profit and loss statement.
What is a Balance Sheet?
A balance sheet is a snapshot of a company's financial condition at a specific point in time.
It shows the assets, liabilities, and shareholders' equity of a business.
This financial statement is always in balance by following the rules of the balance sheet equation: Assets = Liabilities + Equity.
What is on a Balance Sheet?
The balance sheet is divided into two main parts: the left side and the right side.
The left side of the balance sheet shows a company's assets while the right side of the balance sheet shows a company's shareholders' equity and their corresponding liabilities.
Assets
An asset is something that provides value to a business.
Assets can be tangible, such as cash, inventory, or equipment, or intangible, such as trademarks, copyrights, or patents.
Assets are important for businesses because they provide the resources necessary to generate profits and grow the company.
They also help protect businesses from financial risks and uncertainties.
Liabilities
A liability is a company's legal obligation to repay a debt or provide compensation for another party's loss.
A balance sheet lists a company's liabilities in two sections: current liabilities and long-term liabilities.
Current liabilities are those that are due within one year, while long-term liabilities are those that are due after one year.
There are several types of liabilities, including accounts payable, notes payable, accrued expenses, and long-term debt.
Shareholders Equity
Shareholder's equity is the value of a company's assets after liabilities are paid.
In other words, shareholder's equity is a company's total assets minus total liabilities.
It is composed of the common stock, paid-in capital, and retained earnings.
The calculation of shareholder's equity begins with the balance sheet equation: assets = liabilities + shareholders' equity. From this, shareholders' equity is calculated as: assets - liabilities.
How to Create a Balance Sheet
To create a balance sheet, you need to know a company's assets, liabilities, and shareholders' equity.
You can find this information on the financial statements from the prior years.
If no previous financials exist, you will need to hire a firm to conduct an audit of your company in order to determine the value of its assets as well as do a deep dive into how those assets were purchased.
Remember, assets are everything the company owns and can use to pay its debts. Liabilities are the company's debts and other obligations.
When to use the Balance Sheet
A balance sheet is a financial statement that shows the assets, liabilities and equity of a company at a specific point in time.
It can be used to measure a company's financial health and track its progress over time.
The balance sheet can also be used to calculate ratios, which are used to measure a company's performance.
Some of the most common ratios are the debt-to-equity ratio, the current ratio and the profitability ratios.
What is a Profit and Loss Statement (P&L)?
A profit and loss statement (P&L) is a financial statement that summarizes a company's revenues and expenses over a specific period of time, usually a fiscal quarter or year.
The P&L is important because it shows whether the company is profitable or not. A company's net income (the amount of money it earns after expenses are deducted) is shown on the P&L.
What is on a Profit and Loss Statement (P&L)?
The P&L Statement includes revenue, cost of goods sold (COGS), expenses, and profits or losses (net income or loss) for the company.
It can be used to track a company's performance over time or compare it to other businesses in the same industry.
Revenue
In business, revenue (also referred to as sales) is the total amount of money that a company brings in through its various business activities.
This includes revenue from products and services, as well as income from investments and other sources.
Revenue is generated both internally and externally - from customers, suppliers, investors, and other businesses.
The goal of any company is to generate as much revenue as possible in order to grow and expand.
Cost of Goods Sold (COGS)
COGS, or cost of goods sold, is the direct cost of producing the goods and services sold by a company.
This includes the cost of the materials used in production, as well as the cost of labor. The calculation of COGS is an important step in determining a company's profitability.
Certain expenses are not included in COGS, but are instead classified as operating expenses.
Gross Profit
Gross profit is the most fundamental metric to measure a company's financial health and performance.
Gross profit is calculated as total sales revenue minus the cost of goods sold.
This metric strips away all the other costs a company may incur, such as administrative and marketing expenses, to provide a snapshot of how much money is being earned from selling products and services.
Operating Expenses
Operating expenses are the day-to-day costs of running a business.
These costs can include items like rent, employee salaries, and marketing expenses.
Operating expenses are important for businesses to track because they can impact the company's profitability. In order to stay profitable, businesses need to ensure that their operating expenses are lower than their revenue.
Net Income
Net income is the total amount of a company's revenue after subtracting the cost of goods sold and other operating expenses.
This figure is found on a company's income statement and is used to measure a company's profitability.
The calculation of net income takes into account all revenue sources, including sales, investments, and fees.
It also includes all costs associated with generating that revenue, such as the cost of goods sold and operating expenses.
How to Create a Profit and Loss Statement (P&L)
To create a profit and loss statement, you'll need to gather information about your company's revenue and expenses for the designated period.
This information can be found in financial statements, invoices, receipts, and other records.
Having a dedicated, expert bookkeeper to keep all of this financial information organized for your company is essential to the process of creating the P&L, as well as the balance sheet.
When to use the Profit and Loss Statement
A profit and loss statement is an important document for a business. It shows the company's income and expenses for a specific time period.
This information can help business owners make informed decisions about their company's future.
A profit and loss statement can be useful for making decisions about pricing, hiring, and investments.
Balance Sheet vs. P&L Statement: The Key Differences
The main difference between a balance sheet and a profit and loss statement is that a balance sheet shows a company's assets, liabilities, and owner's equity at a specific moment in time, while a P&L statement shows a company's revenues and expenses over a period of time.
A balance sheet is just as important because it shows a company's financial stability at a given point in time.
Why an Expert Bookkeeper is Crucial for Creating Useful Financial Statements
A bookkeeper is a necessary part of any business.
They keep track of the company's finances and make sure everything is in order.
This can be crucial for a business, especially when it comes to creating financial statements. A bookkeeper can also help with budgeting and forecasting.
If you're looking to grow your business, it is absolutely necessary to have a certified, professional bookkeeper on your team.
How Noon Can Help Your Business Thrive
Noon Bookkeeping is an outsourced bookkeeping and accounting solution for business owners consisting of a team of CPA's and certified, expert bookkeepers ready to help you organize the finances of your business.
We can handle all of your bookkeeping in one place so that you can focus on running and growing your unique business knowing that we've got your finances handles.
Learn more about how Noon can help you take control of you finances today.