Balance sheet and profit and loss account are the key indicators when one wants to look at the performance of a company during the year and by looking at both the accounts together one can have a fair idea about the company and its financial standing. However there are some differences between balance sheet and profit and loss account. Let’s look at some of them –
- Profit and loss account is an account which shows the revenue and expenses details for the accounting period whereas balance sheet is a statement of assets and liabilities which the firm owns at the end of the year.
- In profit and loss account one does not has to carry forward balances whereas in a balance sheet the assets and liabilities balances are carried forward to next year and closing balance of this year becomes the opening balance of next year.
- Profit and loss account ends with a definite figure which may be profit if revenues are more than expense or loss if expenses are more than revenues, whereas in case of balance sheet both asset and liability side of balance sheet should match.
- Balance sheet shows the financial position of the company at a particular point of time whereas profit and loss account determines the profit or loss made by the company during the year.
- Profit and loss account is always made first and then one can prepare balance sheet, this order cannot be reversed.
- While profit and loss account includes nominal accounts only like salary paid, commission earned, insurance premium etc.., whereas balance sheet includes both real and personal accounts like land, building, creditors, debtors etc…
Though there are many differences between the two one should never make the mistake of looking at one statement and ignoring the other because in order to arrive at correct conclusion regarding the financial position of the company looking at both the statements is necessary as they both complement each other.