Question

Case Study:

After graduating from college, best friends Sally and Sandy decided to open a landscaping business. Sally had majored in accounting, so she would handle the business’ financial operations. Sandy, who had majored in landscaping, would handle the landscaping operations.

Sandy worked with clients to recommend plants, develop and implement landscape plans, and run the retail store that featured seasonal plants and landscaping supplies. Sally’s responsibilities were to review the financial reports and monitor the business’ accounts, both accounts payable and accounts receivable. She prepared the business’ activity reports and financial forecasts.

Although each managed completely different aspects of their landscaping business, Sally and Sandy agreed to meet each quarter to review what had transpired in the landscaping operations and where their business stood financially through use of a profit and loss (P&L) statement and a balance sheet.

Explain to Sandy what a P&L statement is and what it tells the manager about the financial condition of the business. Explain how the P&L statement is different than the balance sheet. How is the balance sheet helpful to a business manager?

Answer 1

What is the P&L Statement?

P&L statement is an abbreviated form of Profit & Loss Statement which shows the profit and loss position of the business. It summarises all the revenue, cost and expense transaction occurred during the year. It shows what did the business achieve in terms of net gains/ loss during the period of time.

It includes all the revenues earned by the business, corresponding costs and expenses incurred to run the business.

How it is different from the Balance Sheet?

Whereas on one side, Profit and Loss Account shows total revenue, expenses, and profit. The balance sheet shows the total assets, liability (the money that we owe) at any specific point of time. The one of the major difference between both of them is P&L is for a certain period of time ( say Day 1 to Day180) on the other hand Balance Sheet is on a specific date (say balance sheet as on Day 180).

Therefore, it can be said that P&L is for a period and balance sheet as on a point of time.

How a Balance sheet is helpful?

Balance Sheet shows the business manager what it owes to other people such as suppliers, employees, lenders, bank etc. and what it owns such as machinery, building, inventory etc. It is like a bird's eye view to the whole business.

There are also various ratios and analytics based on the Balance sheet which help business managers to assess the performance of the business and take corrective actions.