Difference Between Profit and Loss Account and Balance Sheet

PHS Team

01 Sep, 2025

When reviewing financial statements, the balance sheet and profit and loss account are two key documents that often confuse. The balance sheet gives a snapshot of what a company owns and owes at a specific moment, showing its financial position clearly. In contrast, the profit and loss account summarises the company’s revenue and expenses over a period, highlighting its profitability.

Understanding the difference between these financial statements helps business owners and stakeholders make better decisions. While the balance sheet focuses on assets, liabilities, and equity, the profit and loss account reveals how well the company performs financially over time. Together, they provide a complete picture of a company’s health and growth potential.

What is a Balance Sheet?

A balance sheet is a financial report that summarises your business’s financial state at a specific point in time. It shows what your business owns (assets) and what it owes (liabilities), helping you understand the overall financial health. For individuals running a business, it’s like a snapshot that reveals your company’s net worth and helps in making informed decisions about growth and investments.

By regularly reviewing your balance sheet, you can track progress and manage resources effectively, ensuring your business stays financially strong and stable. This document is essential for planning and securing loans or investments.

What is a Profit and Loss Account?

A Profit and Loss Account, also known as a P&L statement, is a financial document that summarises your business’s revenues, costs, and expenses over a specific period. It helps you see whether your business made a profit or faced a loss during that time. By tracking income and expenses clearly it gives you an easy way to understand your company’s financial performance and make informed decisions for growth.

Difference Between Profit and Loss Account and Balance Sheet

Understanding financial statements is essential for anyone managing personal finances or running a business. Among these, the balance sheet and profit and loss (P&L) statement are two of the most important documents, yet often misunderstood. Both provide vital but different insights into your financial health. 

Timing

• The balance sheet captures a snapshot of your financial position on a specific date, like capturing a photograph of your finances on that day.
   
• The profit and loss statement covers a period, such as a month, quarter, or year, showing how money flowed in and out over time.

Content

• A balance sheet lists your assets (what you own), liabilities (what you owe), and equity (the difference), providing a clear view of your net worth at that moment.
   
• The profit and loss statement details income and expenses, revealing whether you made a profit or suffered a loss during the period.

Purpose

• The balance sheet helps you understand your overall financial stability and liquidity. Can you pay your debts and maintain your assets?
   
• The profit and loss focuses on profitability are your revenues growing, or are expenses eating into your income?

Use

• Investors, lenders, and personal financial planners use the balance sheet to assess long-term financial health and risks.
   
• The profit and loss statement is used to track performance, identify spending patterns, and guide budgeting decisions.

Preparation

• The profit and loss is prepared first, summarising the results of operations during the period.
   
• The balance sheet is prepared after incorporating the profit or loss amount into equity to update your financial position.

Balance Sheet

The balance sheet is a core financial statement that shows a company’s financial position at a specific date. It is divided into three main components:

1. Assets: Resources the company owns, classified as
    
   1. Current Assets: Cash, accounts receivable, inventory, prepaid expenses
   2. Non-Current Assets: Property, equipment, intangible assets like patents
       
2. Liabilities: What the company owes, divided into
    
   1. Current Liabilities: Short-term debts like accounts payable and accrued expenses
   2. Non-Current Liabilities: Long-term loans, bonds, lease obligations
       
3. Equity: Shareholders' residual interest after liabilities, including
    
   1. Common stock
   2. Retained earnings (profits reinvested in the business)

Together, these components ensure the balance sheet equation:
Assets = Liabilities + Equity.

Profit and Loss

The profit and loss (P&L) account, also known as the income statement, summarises a company’s financial performance over time. Its main components include:

• Revenues: Income from sales or services
   
• Expenses: Costs incurred to earn those revenues, such as salaries, rent, and utilities
   
• Net Profit or Loss: The difference between revenues and expenses, showing if the company made a profit or loss during the period

This financial statement helps track operational efficiency and profitability, complementing the balance sheet to provide a full financial picture.

How Balance Sheet and Profit and Loss Are Related

The balance sheet and profit and loss account are closely connected financial statements that together provide a complete picture of a company’s financial health. The balance sheet shows what the business owns and owes at a specific point in time, including assets, liabilities, and equity. Meanwhile, the profit and loss statement summarises the company's income and expenses over a period, highlighting profitability.

Interaction

• Net income or loss from the profit and loss account flows into retained earnings on the balance sheet.
   
• Changes in cash, inventory, and other assets reported in the balance sheet often result from business activities shown in the profit and loss statement.
   
• Expenses like depreciation are recorded in the profit and loss and accumulated as contra accounts on the balance sheet.

By reading this blog, you get complete details about balance sheets and profit and loss accounts. If you have any questions, we are here to help. Our expert team of accountants assists with final or annual accounts. We will ensure your final accounts are accurately prepared and filed with Companies House and HMRC. Contact us at 0208 8611685 or email info@phs-uk.co.uk. Get in touch today for reliable support with your final accounts.

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