Well, let’s talk about why I want to do this video – ultimately like, business owners, they need to have some kind of financial awareness and they need to understand basic financial terms. So if you grow in this game, you know, in business, it’s really important to understand what the difference between the balance sheet and profit and loss are, because eventually you get to a point where you have conversations about this and you’ll need to sound like you know what you’re talking about.
So, let’s talk about profit and loss it’s official name is statement of sorry, income statement. The profit and loss is officially known as income statement. The accounting bodies tried to change that it used to be called a profit loss, but for some reason they didn’t like it and tried to change it to income statement and every accounting professionals meant to use that term. But no one does. So, okay. And then the balance sheet is essentially the official term statement of financial position. But once again there’s nothing wrong with the balance sheet, but the accounting bodies tried to change that too and that hasn’t really been adopted.
So, sometimes you’ll hear the terms income statement or financial position and what they are essentially doing is referring to a profit and loss and a balance sheet. But I’m going to talk about profit and loss and balance sheet and hope the accounting gods don’t don’t take vengeance on me.
So, what is a profit and loss? Well, a profit and loss is essentially a report, which shows you how much money your business made between two dates. A lot of the time it can be run for a month, it could be run for a quarter, it could be run for a year and it’s got certain things on it. It shows you how much money came in via sales.
It shows you how much money went out for things like cost of sales and expenses and it can also include things like your tax bill on there. But, at the bottom of all of that, you’ve got your net profit and then you’ve got your after tax profit. And that’s, if you want to know how much profit you made, you’d look at and your profit and loss and really the profit and loss is essentially it’s run for a period of time.
The balance sheet is slightly different to that because the balance sheet shows a cumulative position up to that period of time. So what I’m, what do I mean by a cumulative position? Well, a balance sheet shows you everything your business has achieved. As of that period of time. So you can’t, unlike a profit and loss where you can say, Hey, how much money did I make between these periods with a balance sheet, what you’re essentially saying is what was our cumulative position as a business as of this date or as of that date?
If you can’t run it for between dates, that’s what I’m essentially saying. And the balance sheet shows you some other useful information as well. It shows you things like how much your business has in terms of assets. It shows you how much your business has in terms of its bank account and other money that’s owed to it through debtors.
The child’s like, you already know that anyway, but it’s just like one document work where it’s all consolidated in one place. But it also shows you other things, like it shows you how much money you owe to other people, like in terms of taxes or your creditors. Or even yourself as a director, if you like, borrow, if you’ve lent the business money over the years.
And that’s all in there. And then also what the balance sheet also shows you is how much money your business has made all together up to that point in terms of profits that hasn’t been paid out to you yet. So like, and that’s quite useful because when you’re looking at a business’s balance sheet online, which you can do, you can’t look at its full balance sheet, but you can look at something called an abridged balance sheet if they file it.
And the abridged balance sheet gives you some information that you can actually use to understand the health of that business. Especially like, and one of the most important figures is really the net asset value at the business, you know, is saying, excluding like goodwill, what is the business really worth in terms of everything that’s ever come in, everything that’s ever gone out?
And also like everything that’s it owns and it owes. So understanding the net asset figure in a balance sheet is quite useful. And then depending on how much you understand about it, there’s lots of other things you can figure out from a balance sheet. So it’s that’s what the balance sheet actually does.
It helps people understand as of that date, how was that business actually doing it from a financial point of view, but it doesn’t always necessarily tell you how much profit that business made in any period of time because it’s a cumulative figure. So, this is it, like, that’s the difference, main difference between income statement and statement of financial position or profit and loss and balance sheet.
What is essentially one is how much money do I make between that period of time? And the other one is what is my business worth in terms of everything I own and owe? And that’s quite useful. If you found this video useful, if you’ve got any questions regarding it, definitely go to our website and accounting.
co. uk and book a call with me, working to write in more detail and also remember all the other great content we’ve got there and I’ll see you at the next video.