Balancesheet & P&L

Balance sheet

  • The balance sheet gives you a snapshot of how much your business owns (its assets) and how much it owes (its liabilities) as at a given point in time. That might be today, or it might be at the end of your business’s accounting year.
  • The top half of the balance sheet starts with the business’s assets. These are divided into fixed assets, like large items of equipment like computers and furniture, and current assets, which are assets that are more easily and quickly converted into cold hard cash, like money owed by customers and money in the bank.
  • The balance sheet then shows the business’s liabilities, which divide into current liabilities, money due within a year like tax bills and money owed to staff, and long-term liabilities, which are due in more than a year, like a mortgage or a bank loan.
  • There will then be a total of all the business’s assets less its liabilities. If the business were to sell all its assets off and pay all its debts, anything left over would be available for the business’s owner(s) to draw out. That’s why the bottom half of the balance sheet is headed up something like “Owners’ Equity”, “Owners’ Capital”, or “Shareholders’ Funds”.
  • The total of the bottom half of the balance sheet will equal the top half. These two totals are called the balance sheet total.

Profit and loss account

This is often called the P&L for short, and it shows your business’s income, less its day-to-day running costs, over a given period of time – often a year, month, or quarter.

The day-to-day running costs divide up into direct costs, which are costs that relate immediately to sales, and overheads, which are general running costs. For example, the cost of buying materials to make goods to sell, and the cost of delivering finished goods to customers, would be direct costs. Rent of an office would be an overhead. If your business sells services, it may not have any direct costs.

Your business’s income from sales is called turnover. Turnover less direct costs gives a figure called gross profit. A business’s total income, less all its day-to-day running costs, is its net profit.