Companies produce different financial statements as a snapshot of business activities. Two of the most essential are the balance sheet and the profit and loss statement. Many business owners have these documents prepared by accounting services. Here’s an explanation of what each statement provides. 

What Are the Key Differences?

The balance sheet and the profit and loss statement each contain particular account items to summarize a different aspect of the business. The balance sheet shows what the company owns and owes through the assets, liabilities, and equity, or capital. Assets represent long- and short-term resources that the company utilizes in operations. Liabilities pertain to debts and other obligations to settle, and the shareholders’ equity is what’s left when assets are liquidated to repay debts.  

On the other hand, the profit and loss statement shows the financial health of a business through revenue and incurred costs. If your business is not profitable, you’ll need to find a way to improve the bottom line by reducing expenses or increasing profits.  

Another difference between the two is how they’re prepared by accounting services. The balance sheet covers a specific date, outlining a company’s financial position at that time. Meanwhile, the income statement encompasses a period of time, say a fiscal quarter or year, to show how much a business has earned and paid to maintain operations.   

How Do Both Benefit Businesses?

Business owners need both financial statements, preferably done by a reliable accounting service, to see the company’s current condition and performance. Both the balance sheet and the profit and loss statement can be used to assess growth potential, operational efficiency, and soundness based on calculated financial ratios. For instance, do liabilities exceed the assets? If yes, lenders and investors may be wary of providing additional funding for a proposed business expansion.

Similarly, the profit and loss statement can help you, the business owner, identify areas for improvement in operations. It can serve as a guide for plans and direction, especially those concerning profitability and cost-efficiency.  

Balance sheets and profit and loss statements are essential to keep your business running. For accurate financial statements, turn to a trusted CPA like Linda M. Shiraiwa CPA, PS Inc. Headquartered in Gig Harbor, WA, they provide bookkeeping, accounting services, and tax education to local businesses. Call (253) 858-6030 to schedule a consultation or visit them online.