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How to understand profit and loss account and balance sheet for a business enterprise
8 years ago

Accounting Question asked by Rasel

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Profit and Loss is a statement where a business enterprise present net profit or loss by deducting cost of sales from revenue/turnover to get gross profit/Loss first.
Selling and Admin expenses are then deducted from gross profit/Loss to get Net Profit/Loss.
Balance sheet is the representation of overall financial position of a business enterprise mainly by showing Non Current and Current Assets & Liabilities with Equity/Share capital & Retained Earnings.
Answered by [Deleted Member]
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The best way to understand them is to view them together, the profit and loss represents the gains or losses during the period and the balance sheet represents a snapshot in time of the enterprise`s assets, liabilities and equity.

If profit has been generated through the year, then the balance sheet must also have strengthened (ie net assets would have increased). Vice-versa is also true.

let me know if you need further assistance.
Answered by [Deleted Member]
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Hi Rasel,
That is quite a large question, on which books have been written!
To add to the previous answers:
The Balance sheet (B/S) shows the value of an enterprise at a point in time.
The P&L account shows the performance of the enterprise during a period, say a year.
As an example at the end of Year 1 an enterprise may be worth £100 (per the B/S). If in Year 2 its P&L account shows a profit of £50, then its B/s will show it to be worth £150.
If the P&L account for Year 3 shows a loss of £20, then its B/S at the end of Year 3 will show a value of £130.
This is a simple view and the P&L account, for example, will show much detail of Income and costs. To make sense of it, the first step is often to make comparisons with:
-the previous year`s P&L
-the current year budget
-competitor`s P&L
You would need to analyse increases and decreases in income and costs, and try to explain them.
It would be interesting to know why you are asking this question.
Answered by [Deleted Member]
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Entries are posted from the ledger accounts into the trial balance, from here adjustments are made if required and then figures moved to profit and loss or balance sheet. The profit or loss is posted to the balance sheet as well.
Assests + Current liabilities= non current liabilities +equity.

I hope this helps.
Answered by [Deleted Member]
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