Knowing your numbers is key to running a successful business – but let’s be honest, not everyone gets excited about diving into the details of company accounts. Whether you’re just getting started or looking to learn the basics, we’re here to break down the core financial reports in a way that actually makes sense.

The profit and loss report and the balance sheet are both key reports when it comes to getting in control of your company’s finances.

What’s a profit and loss statement?

Your profit and loss statement is commonly called your P&L but is also referred to as your income statement or statement of earnings. It gives you a clear picture of how your business is performing. It’s a full breakdown of your company’s revenue (money coming into the company as sales and other business income) and your expenditure (direct costs, overheads, expenses and other costs).

Tracking your P&L over time helps you spot where you’re making money and where you’re spending it. The more you make, and the less you lose, the greater your profits will be at year-end.

The P&L statement is good for:

– Giving you a breakdown of all revenues and relevant costs and expenses

– Showing the profit and loss figures over a set period of time

– Summing up your profit and loss for the period to gauge if you’re profitable.

What’s the balance sheet?

The balance sheet gives you a snapshot of how financially healthy your business is at a specific time. It is based on the following accounting equation: Equity = Assets – Liabilities.

The balance sheet shows you the company’s:

– Assets (the things the company owns, including cash)

– Liabilities (the things the company owes other people)

– Equity (retained earnings plus the funds you originally invested as shareholders)

While the P&L looks at your income and spending overtime, the balance sheet is more like a snapshot of your business’s financial position at a single point in time. In a nutshell, it shows you what the company is worth on paper right now, based on the current numbers in your accounts. So, it is a vital tool in your accounting toolbox.

The balance sheet is helpful for:

– Assessing the current financial position of the company

– Providing evidence of your financial position to banks, lenders and investors

– Giving potential buyers an idea of the company’s tangible net asset value, if you plan to sell up.

Talk to us about expanding your accounting skills

If you are not quite sure what counts as an asset or how equity fits in, you’re not alone. Accounting can be complicated, and it takes time to get your head round it all. Get in touch with us and we can help you.