Understanding your company’s financial health is critical as it helps make intelligent business decisions. Unfortunately, accounting is not every entrepreneur’s top skill, and many fail to get into the nitty-gritty of their organisations’ financial records.
The balance sheet and profit & loss statement are two vital financial reports that reflect a company’s financial health. Understanding what these reports convey means gaining a clear view of your company’s financial state.
This post is crafted for people new to company accounting, where we will discuss the basics of the profit and loss statement and the balance sheet. Continue reading to expand your accounting knowledge and gain competence in business finance.
Profit and Loss Statement
A profit & loss statement is widely known as a P&L account. People often refer to it as an income statement or statement of earnings. It provides a full breakdown of a company’s:
- Revenue: Incoming money in the form of sales and other business income
- Expenditure: Payment made with cash or credit to buy goods or services
Close observation of the P&L will allow entrepreneurs to monitor revenues and expenses for a specific period. They can then look back over the period to check where they are making money and where they are losing it. Businesses can only be profitable if they make more and lose less money. P&L, in this context, can be used as a barometer to measure the profitability of a business. Every accountant in NZ and beyond recommend clients track P&L statement for:
- Getting a comprehensive breakdown of revenues and expenses
- Monitoring and summing up your profit and loss for a particular period
The balance sheet provides a snapshot of a company’s financial health based on the following accounting equation:
Equity = Assets – Liabilities
In the balance sheet of a company, you can check its:
- Assets: Possessions that a company owns, including cash and cash equivalents
- Liabilities: Things that the company owes
- Equity: Funds invested by promoters and shareholders (if applicable) plus retained earnings
Keeping an eye on the balance sheet can be useful for:
- Measuring the financial position of the organisation
- Providing the net value of the tangible asset to potential buyers in case you are planning to sell up
Entrepreneurs can also use their balance sheets to prove their financial position to investors and lenders.
We hope our discussion has helped you learn the fundamentals of company accounting. However, this is only basic, and the entire accounting process can be complex. Therefore, relying on an expert accountant in NZ or other countries is always recommended. Let experts manage your P&L, balance sheet, and other accounting aspects. Meanwhile, you can focus on your core operations. Elite Accounting Limited is an Auckland-based certified public accountant firm offering a full spectrum of services, including accounting and tax, bookkeeping and payroll, tax review and audit, audit and assurance, financial supervisory, advisory, etc. Contact us now to discuss your requirements. Let our team assist you with bespoke service and clear guidance to keep your business accounting organised and your tax preparation process effortless.