When we were in school or college, we used to have our semester or quarterly exams and then final exams.

When we were in school or college, we used to have our semester or quarterly exams and then final exams. So here, the semester exams can be called a profit and loss statement, as the semester’s results helped us to know which subjects are we weak and where should we put in more effort. The final results/ annual results showed us the results of all our semester efforts put together, which we can compare to a balance sheet. So just like our quarterly exam results, profit and loss statements, which come every quarter can track where the company should concentrate more on improvements. And the balance sheet shows us how their efforts for improvement finally worked. So this is where the difference lies.

Now before we understand the differences further, let us first know that both P&L and BS are financial statements that provide an ongoing record of a company’s financial condition. These are used by market analysts, and investors to evaluate a company’s financial soundness and growth potential.

Now coming back to the differences: A profit and loss statement or income and expense statement summarizes the income and expenses incurred during a specific period, usually a fiscal quarter or a year, just like our semester results. On the other hand, the balance sheet, provides a snapshot of a business at an exact point in time. It helps a company to know the position of its assets and liabilities on the last day of the reporting period, just like our annual results. The profit and loss account provides information about the company’s ability or inability to generate profit by increasing revenue, or reducing cost or both. While, the Balance sheet offers information about how much money a company has utilized in assets, and how much it owes as liabilities and what is left when you net the two together. So, a profit and loss statement gives you the data of day to day functioning of the company whereas the balance sheet gives you the annual report of the combined effect of day to day functioning of the company.

So from the investor’s point of view, the P&L statement tells investors about the company’s financial progress, and the balance sheet tells investors about the company’s financial position. So when you are analyzing a company for investment, check both the business progress and position of a company. Try to make a comparison for five years or 10 years to get a clear view of the actual growth pattern of the company as share prices are a direct replica of the company’s performance.

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