The balance sheet and the profit and loss statement
(P&L) are essential components of the annual financial statements. They
provide an overview of the economic situation of a company and show which
assets it owns, which obligations it has and what result was achieved during
the financial year.
Further information on the topic of annual financial
statements can be found in our glossary article Annual Financial Statements.
What is the balance sheet?
The balance sheet presents the assets and financial
position of a company at a specific point in time, usually at the end of the
financial year. It is divided into two main sections:
Assets
The asset side shows the company’s assets, for
example:
- real estate, machinery and other fixed assets;
- inventories and stock;
- trade receivables from customers;
- bank balances and cash.
Liabilities and equity
The liabilities side shows how the company’s assets
have been financed. It
includes in particular:
- equity (e.g. share capital and reserves);
- liabilities towards banks, suppliers or other creditors;
- provisions.
An important role is played by the so-called balance sheet accounts. They record the individual asset
and liability positions and form the basis for preparing the balance sheet.
The balance sheet must be prepared in such a way that
the company’s assets and financial position are presented accurately and
fairly. For entrepreneurs and managers, it is an important source of
information as it provides insights into liquidity, indebtedness and the
company’s equity position.
What is the profit and loss statement?
The profit and loss statement shows how the company’s
financial result has developed during a financial year. It compares the
revenues and expenses of a company.
The main components are:
- Revenues: income generated from the company’s business activities, such as sales revenue or other operating income;
- Expenses: costs incurred by the company, such as material costs, personnel expenses, depreciation and interest expenses.
An important concept in this context is the use of income statement accounts. These accounts record revenues and
expenses relating to a specific period.
If revenues exceed expenses, the company generates a
profit. If expenses are higher than revenues, the result is a loss. The annual
profit or loss determined in the profit and loss statement is transferred to
the balance sheet at the end of the financial year. A profit generally
increases equity, whereas a loss reduces equity.
Why are the balance sheet and profit and loss statement important?
The balance sheet and the profit and loss statement
are not only mandatory components of the annual financial statements, but also
important tools for business management.
They enable, among other things:
- the assessment of the company’s economic development;
- the analysis of profitability;
- the planning of future investments;
- discussions with banks and business partners.
A combined analysis of the balance sheet and the
profit and loss statement therefore provides a comprehensive view of the
company’s financial stability and economic development.