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.
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:
Liabilities and equity
The liabilities side shows how the company’s assets have been financed. It includes in particular:
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.
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:
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.
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:
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.