How do balance sheets differ from profit and loss accounts?

Balance sheets provide a snapshot of a company's financial position, while profit and loss accounts show performance over a period.

Balance sheets and profit and loss accounts are two fundamental financial statements in business, but they serve different purposes and provide different types of information. A balance sheet, also known as a statement of financial position, provides a snapshot of a company's financial position at a specific point in time. It lists all of a company's assets, liabilities, and equity. Assets are what a company owns, liabilities are what it owes, and equity is the difference between the two, representing the net resources that the owners have invested in the company.

On the other hand, a profit and loss account, also known as an income statement, shows a company's performance over a period of time, typically a year. It lists all of the company's revenues and expenses, and the difference between the two is the company's profit or loss for the period. The profit and loss account shows how well a company is operating, while the balance sheet shows what the company is worth.

The two statements are linked, as the profit or loss for the period from the profit and loss account is added to the retained earnings on the balance sheet. However, they provide different perspectives on the company's financial situation. The balance sheet is more about the company's financial health and stability, while the profit and loss account is more about its operational success and profitability.

In summary, while both balance sheets and profit and loss accounts are crucial for understanding a company's financial situation, they provide different types of information. Balance sheets give a snapshot of a company's financial position at a specific point in time, showing what it owns and owes. Profit and loss accounts, on the other hand, show a company's performance over a period, detailing its revenues, expenses, and the resulting profit or loss.