What is the difference between a P&L, a balance sheet and a cash flow statement?
Each one answers a different question about the same set of books. The profit and loss statement covers a stretch of time, such as a month or a year, and asks whether the business made money. The balance sheet is a snapshot on one date and asks what the business owns, what it owes and what is left for the owner. The cash flow statement covers a stretch of time too, but it follows the cash itself: where it came from and where it went.
IRS Publication 583 puts the first two plainly. An income statement shows the income and expenses of the business for a given period of time, and a balance sheet shows the assets, liabilities and your equity in the business on a given date. The publication adds that these statements can help you in dealing with your bank or creditors and help you manage your business.
| Report | Time it covers | Question it answers | What it is built from |
|---|---|---|---|
| Profit and loss (income statement) | A period: a month, a quarter or a year | Did the business make a profit? | Income and expenses, each in its own category |
| Balance sheet | One date, such as December 31 | What does the business own and owe, and what is left for the owner? | Account balances: bank, money customers owe, equipment, loans, cards and bills |
| Cash flow statement | A period, like the P&L | Where did the cash come from and where did it go? | Every movement of cash in and out of the business |
Why can a profitable month still leave the bank account short?
Because profit and cash are counted differently, and the gap between them is where most owners get surprised. A few ordinary examples:
You finish a job in October and invoice the customer, who pays in December. If your books record income when you invoice, October's P&L shows the sale, but the cash doesn't arrive for two months. Paying down a loan takes cash out of the bank, yet only the interest is an expense on the P&L; the rest reduces what you owe on the balance sheet. Money you put into the business or take out as the owner moves cash without being income or an expense at all.
None of that means the P&L is wrong. It means the P&L alone can't tell you whether you can cover next month's bills. That is the cash flow statement's job, and the balance sheet shows where the money ended up: in the bank, still owed to you, or spent on something the business now owns.
Which report should a Glastonbury owner read first?
Start with the question you actually have this month.
| Your situation | Start with | Then check |
|---|---|---|
| You want to know whether the business is making money | The P&L, month by month | The same month last year, if you have it |
| Cash feels tight, or you're planning a big purchase | The cash flow statement | The bank balance and the bills due on the balance sheet |
| A bank or lender has asked for financials | The P&L and the balance sheet | Whatever else the lender's own list asks for |
| Your tax professional wants year-end figures | The P&L and the balance sheet for the full year | Their list, since tax questions sit with them |
If a loan application is the reason you're looking, it helps to see the whole list early. This checklist of what a small business lender usually asks to see sorts the documents by situation, and the lender's own list is still the final word.
How does the balance sheet connect to Glastonbury's personal property declaration?
Equipment, furniture and computers the business owns sit on the balance sheet as assets, and the detail behind that line is a list of what was bought, when, and for how much. Glastonbury's Assessor asks for the same detail. Every owner of business personal property files a declaration with the Assessor by November 1, or the next business day when that date falls on a weekend, giving each asset's date of acquisition and its original cost, including installation. The Assessor's filing tips say that writing "no change" or "same as last year" does not meet the requirement, and a missing or late declaration carries a 25% penalty.
When each purchase is recorded with its date and full cost as it happens, next year's figures are already in the books. Filing the declaration, and any question about what is taxable, stays with you and the Assessor's office. Our guide to what the Connecticut declaration needs from your books walks through the records side, and the page on bookkeeping for Glastonbury businesses sets out how the Assessor takes declarations and extension requests.
Do the reports mean anything if the books aren't reconciled?
Not much. Every report is only as accurate as the entries behind it. IRS Publication 583 says to reconcile your checking account each month. If the bank account hasn't been matched to its statements, the P&L can be missing a sale or counting a payment twice, and the cash line on the balance sheet won't agree with the bank.
So the order is: reconcile the month, then read the reports. Bank and credit card reconciliations come first. If several months are behind, bookkeeping cleanup and catch-up gets the books to a point where the reports can be trusted again.
Start a conversation with Brittany about getting your months reconciled, so you can check the reports against the bank.
Call (860) 234-7704Where does Brittany Rose Bookkeeping fit in?
Brittany Rose Bookkeeping offers financial statements and reporting alongside bookkeeping in QuickBooks Online for small businesses in Glastonbury and across Hartford County. The scope for each business is set with Brittany before work begins. Tax questions about what the reports mean for your return go to your tax professional.
To talk through which reports your business should be reading each month, call (860) 234-7704 or start a conversation through the contact page.
