Being on top of your finances is a must for all businesses. Whether you’re in e-commerce, manufacturing, or construction, if you don’t have your financial records and accounting in check, you may be in for some major headaches down the road.
Today, we’ll focus on a couple of the major financial statements that you’ll deal with. The first is your profit and loss statement and the second is your balance sheet.
If you’re looking to start a construction business and are still trying to understand the accounting behind it — or are simply looking for a better understanding of these two statements — then you’ve come to the right place.
We’re going to break down what exactly both of these financial statements mean and the main differences between them.
What is a Balance Sheet?
A balance sheet is simply a document that references all of your company’s assets, liabilities, and shareholder equity at a specific point in time.
In addition to this, your balance sheet will describe your rates of return and evaluate your capital structure (the particular distribution of debt and equity that makes up the finances of your company).
To simply put it, your balance sheet will summarize what your company owns, what you owe, and how much is currently invested by shareholders.
Here are some examples of the types of items that fall under the three main categories of a balance sheet (assets, liabilities, shareholder equity):
Assets
- Cash
- Temporary Investments
- Accounts Receivable
- Inventory
- Prepaid Expenses
- Long-term Investments
- Land
- Machines
- Equipment
- Vehicles
- Goodwill
Liabilities
- Notes Payable
- Accounts Payable
- Salaries Payable
- Wages Payable
- Interest Payable
- Other Accrued Expenses Payable
- Income Taxes Payable
- Customer Deposits
- Lawsuits Payable
- Unearned Revenues
Equity
- Retained Earnings
- Shareholder Distribution
- Shareholder Contributions
Profit and Loss Statement
A profit and loss statement is also known by the following names: statement of profit and loss, statement of operations, statement of financial results, and income and expense statement.
However, it is most commonly referred to as the income statement of your business. This statement summarizes the revenues, costs, and expenses that you have incurred over a certain time period.
Typically, this time period is a fiscal quarter or year.
Your profit and loss statement will provide two vital pieces of information for you.
First, it will illustrate the top and bottom line for your business.
Your top line is exactly what it sounds like: your total revenue over that time period. The statement that subtracts all the costs of doing business (i.e. costs of good sold, taxes, interest, operating costs, etc). The difference is your bottom line — otherwise known as your net income or earnings.
Next, your profit and loss statement will tell you about your business’ realized profits and losses.
After a while, your profit and loss statements will allow you and your accountants to see whether or not you’re increasing profits, reducing costs, or increasing your top line with more sales.
By carefully reviewing these statements, you’ll be able to see how seasonality affects your profits, as well as which costs are cutting into your revenue the most and where you have room for improvement in that area.
The Differences Between Your Profit & Loss Sheet and Balance Sheet
One of the main differences between these two statements is their purpose. While at first glance, they may sound similar, they are created for very different reasons.
A profit and loss statement is created to measure the financial results of your business over a given period of time. In other words, you can see how your business has done from one specific date to another and whether you made or lost money over that time.
Meanwhile, a balance sheet simply focuses on the value of all your assets, liabilities, and equity as of a given date. Basically, it will show you the financial health of your overall business.
Next, profit and loss statements include only revenue and expense accounts. On the other hand, balance sheets include only real accounts, which are assets, liabilities, and equity.
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If you’re ready to get ahold of your finances and get control over your accounting to ensure you’re maximizing your profits, then contact us today!
