Difference between the Profit and Loss account and Balance Sheet

Difference between the Profit and Loss account and Balance Sheet

Difference between the Profit and Loss account and Balance Sheet:-

The Profit and Loss account is the statement of income and expenses which shows the net profit and loss for the particular period while the balance sheet is the statement of assets, liabilities, and capital which showing the actual financial position of an entity. To know more about the Difference between the Profit and Loss account and Balance Sheet we have to clear the meaning of both the terms. So, first, we will discuss the meaning of Profit and loss account and Balance sheet follows: –

Profit and loss account: –

It is the statement that shows all indirect expenses incurred and indirect revenue earned during the particular period. It is prepared to find out the Net Profit/loss of the business for the particular accounting period. It is calculated by deducting indirect expenses from the Gross Profit/Loss. and adding indirect income/revenue into the Gross Profit/Loss.

Net Profit/Loss =  Gross Profit/Loss + Indirect Income – Indirect Expenses

• Indirect Income = Other incomes which are earned from Business other than the main operation of the business.
• Indirect Expense = All business expenses other than direct expenses.

The Balance sheet:-

It is the statement showing the financial position of the business in a particular accounting period. It is a list of balances of ledger account of assets, capital, and liabilities. The value of assets shows which we can realize from the market and The value of Liabilities shows which we have to pay in the future. Capital shows the amount invested by the owner into the business entity. it is the basis of the following account equation.

Chart of Difference between the Profit and Loss account and Balance Sheet: –

Balance Sheet

MeaningThe profit and loss account is the statement that shows all indirect expenses incurred and indirect revenue earned during the particular period.The Balance sheet is the statement showing the assets and Liabilities/capital of the business at the end particular accounting period.
Object It is prepared to know the Net profit or loss of the business for a particular period.It is prepared to show the true or fair financial position of an entity.
Accounts Included It includes only one type of accounts. i.e. Nominal account.It includes only two types of accounts. i.e. Real and  Personal accounts
Gross Profit/ Loss The profit and loss account does provide information about Gross Profit/loss for the year.The Balance Sheet does not provide information about Gross Profit/loss for the year.
DependencyThe Profit and Loss account is not dependent on the Balance sheet Because it is prepared before the preparation of the Balance sheet.The balance sheet is dependent on the Profit and loss account because Information about Net Profit/Loss collected from the Profit and Loss account.
Balance It has the Balance amount, which represents the net profit/loss for the year. Debit balance means net Loss if Credit balance it means Net Profit.Both sides of the balance sheet always equal to each other. So, it does not has a balanced amount.
Classification of AccountsIn the Profit and Loss account, only nominal accounts are classified into the balance of Incomes/gains and Expenses/loss.In the Balance Sheet, personal and real accounts are classified into the balance of assets, liabilities, and capital.
Time of Preparation It is prepared after preparing a Trading account and before the preparation of the Balance sheet.It is prepared after preparing the Trading and Profit&Loss account.
Sides of Statement The profit and loss account has two sides, on the left side, all expenses and losses are posted and on the right side, all incomes and gains are posted.The Balance Sheet also has two sides(In horizontal form), on the left side, all Liabilities and Capital are posted and on the right side, all accounts of assets are posted.
Information about Stock or inventories In the Profit and Loss account, No Information is provided for opening or closing stock.In the Balance Sheet, Information is provided only for cLosing stock.

Chart of Difference between the Profit and Loss account and Balance Sheet.pdf

The conclusion of Difference: –

These Statements are very opposite to each other. The profit and loss account is prepared only with the balance of Nominal accounts but the balance sheet is prepared with balances of real and personal accounts.