These three statements provide a strong indication of the current health and future prospects of any company. However, it doesn’t consider any outgoings or future income. Cash flow statements track profits, but also how the money was used. For an investor, it is important to scrutinise three financial statements namely Balance sheet, Profit and loss statement and Cash Flow to ‘get the pulse’ of the company’s business and make sure there are no irregular heartbeats that can indicate the business may soon be on life support. Both revenues and expenses should be monitored closely, since they are crucial for the management to grow revenues while keeping costs under control.īesides, investors should pay close attention to the operating section of the income statement to judge how efficiently the management has operated the company. Investors should study the balance sheet for indications of how effective a company's management has been using its debt and assets to eventually generate revenue that get carried over to the income statement. When a business records an expense, its assets will decrease or its liabilities will increase. When a business records a sale, its assets will increase or its liabilities will decrease. The amount shown as cash or at the bank under current assets on the balance sheet will be determined in part by the income and expenses recorded in the P&L. Every time a sale or expense is recorded, affecting the income statement, assets or liabilities are affected on the balance sheet. Both these statements are opposite to each other. To know more about the difference between the profit and loss account and balance sheet, we have to be clear about the meanings of the two terms. Every time a company records a sale or an expense for bookkeeping purposes, both the balance sheet and the income statement are affected by the transaction. The balance sheet, on the other hand, exhibits what a company owns and owes, as well as long-term investments. In simple words, it shows the financial health of a company. The profit and loss (P&L) account summarizes a business’ trading transactions such as income, sales and expenditure and the resulting profit or loss for a given period.
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