Balance sheet vs Profit and loss statement

Balance sheet vs Profit and loss statement, two of the three financial statements which national stock exchange registered companies issues regularly. Statements which depicts companies financial standpoint and are used by investors and analysts to evaluate companu’s future potential and growth.

Third financial statement is the cash flow statement of the company. In total there are three financial statements released by the company.

Keypoints from the blog

  1. Understanding the balance sheet
  2. Profit and loss statement

1. Understanding the balance sheet

A balance sheet reports a company’s assets, liabilities and shareholders equity at a specific period of time. It helps computes rate of return and evaluate company’s capital structure. This statement depicts what company owns and owes as well as the amount invested by the shareholders.

Balance sheet shows company’s resources or assets : Also it depicts how that asset is financed, whether through debt under liabilities or in the form of equity to shareholders. This sheet reveals a quick snapshot to the investors and analysts that how properly company’s management uses it’s resources.

Just like other financial statements, balance sheet is utilized to calcualate certain financial ratios and conduct financial analysis of the company.

Some most important terms under balance sheet :

  • Assets
  • Liabilities
  • Shareholder Equity
  • Trial balance

Assets

Four major sectors which you can check under assets section :

  • Cash and cash equivalents : These are the most liquid assets which may include treasury bill ( T bills ), short term certificates of deposits and cash.
  • Marketable securities : This depicts the equity and debt securities for which there is a liquid market.
  • Receivables : It is the money owned to company by the customers.
  • Inventory : It shows all the goods of the company which is available for sale.

Liabilities

A sector which shows how much money company owes and needs to give back. Three major sector under this section :

  • Debt : It shows the currect position of long term debt and bank indebtedness.
  • Overhead : This accounts for such financial obligations such as rent, tax and utilities.
  • Payables : It shows the wages and dividends owed by the company.

Shareholder equity

Shareholder equity is the difference of firm’s total assets minus the total liabilities. It is one of the most important terms used by analysts to depict financial health of the company.

It shows the value which may come once all the assets are liquidated and debt is repaid.

Retained earnings are recorded in the shareholder equity. It is percentage of net earnings which is not paid out as dividends, which can be used in company’s core business or setlling the debt.

Trial balance

Trial balance is another financial report which is not public, it stays with the company whereas the balance sheet is shared with the investors, analysts and public to study about the company’s finance management.

It contains financial information at the account level such as general ledger accounts and is therefor more granular.

2. Profit and loss statement

P&L statement is also known as company’s income statement. This is a financial statement which depicts company’s total revenue, costs and all the expenses during a specific period of time.

It depicts the company’s ability to generate profit by increasing the revenue or decreasing the cost or both. Some other names of this statement is :

  • Statement of operations
  • A Statement of financial results
  • Income and expense statement

Top line and Bottom line

P&L statement provides top line and bottom line for a company. Top lines shows the entry of revenue of the company, from that amount subtracts the cost of doing business, cost of goods sold, operating expense, tax expense, interest expense, any one time expense etc. The value which comes is bottom line.

The value which remains at the end is what’s known as company’s net revenue or profit of the company.

P&L Statement accountants puts company’s revenue in one part and add up all of it’s expeenses in the other. Total amount of expenses are substracted from the total revenue, this shows the profit or loss of the company.

Assets = Liabilities + Owner’s Equity

Hope you got to learn everything about Balance sheet vs Profit and loss statement, Stay tuned for more upcoming informational blogs.

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