P&L, balance sheet and cash flow: what each one tells you
Banks, investors and your accountant all ask for the same three reports. Each answers a different question about your company.
Profit and loss (P&L)
Question it answers: did the business make money over a period?
It lists income, then expenses by category, and ends with net income. A monthly P&L shows trends: which months are strong, and which costs are growing.
Balance sheet
Question it answers: what does the company have, and who does it belong to, on a given date?
Assets (cash in the bank, money owed to you) on one side, liabilities (loans, money you owe) and owner's equity on the other. The two sides must be equal, which is why it's called a balance sheet.
Owner's equity grows with profit and with money you put in, and shrinks with money you take out.
Cash flow statement
Question it answers: where did the cash come from, and where did it go?
Profit and cash aren't the same. A company can be profitable while its bank balance falls, for example when the owner takes large distributions. The cash flow statement splits movements into operating activities (customers and expenses) and financing activities (owner contributions, distributions and loans).
Reconcile with your bank
At least once a year, compare the cash in your books with the balance on your December 31 bank statement. If they don't match, something is missing, duplicated, or the opening balance is wrong. Reconciled books are what make the three statements trustworthy.
Two more reports your accountant uses
- Trial balance: every account with its debit or credit balance. Total debits must equal total credits.
- General ledger: every transaction, grouped by account.