Finance and Management - 29

In the earlier blog, we discussed about the concept of appropriation. We have in fact dwelled in sufficient depth the various terms that come along with understanding Balance sheet. This would an apt time to introduce the relation between a Balance sheet (BS) and a Profit and Loss (PnL) Account.

The definition of profit or loss need not be extrapolated and are easily understood; we would instead get straight away get to the aspect of difference between BS and PnL.

A BS as we have seen is a "snap shot" of the company at any given instance. What is represented in the BS today might be very different from what is in the BS tomorrow; this makes it hard to really compare the performance of a company across a period of time. PnL Account does precisely this - it shows a company's performance over a period of time. The profit and loss account consists of sales and other types of income, direct costs, overheads, interest and finance costs payable and the tax charge. The summation of the profit and loss account is the retained profit or loss for the period covered by the statement.

A sample PnL account could be seen at this link

What is important to understand is that, the 2 financial statements are very closely linked. In their own right the balance sheet and profit and loss account are useful statements, however they only show half the picture. In order to fully assess the worth of a company, or its performance it is important to look at both of these statements together.

Read in Kannada:
http://somanagement.blogspot.com/2011/09/blog-post_16.html