Part 1 · Keeping the books · Chapter 1.9
Profit and loss, and the balance sheet
Draft: the wording may change.
The idea
The profit and loss statement is a movie: it shows everything earned and spent over a period, from the first day to the last. The balance sheet is a photograph: it shows what the business owns and owes on one day.
Which accounts go where
The five account types from chapter 1.3 split between the two reports:
- Profit and loss: income and expense accounts. Income minus expenses is the profit (or loss) for the period.
- Balance sheet: asset, liability and equity accounts — plus the profit for the period, which belongs to the owner and joins equity.
At the counter
Use the Ravi Stores postings from chapter 1.7. To keep the example small, ignore the cost of the goods sold; chapter 1.13 adds stock and margin.
Profit and loss, October
| ₹ | |
|---|---|
| Sales | 1,200 |
| Expenses | 0 |
| Profit | 1,200 |
GST is not income. The ₹216 collected as GST belongs to the government, so it sits in the balance sheet as a liability.
Balance sheet, 12 October
| Assets | ₹ | Liabilities and equity | ₹ |
|---|---|---|---|
| Cash | 1,336 | GST Output (payable) | 216 |
| Sundry Debtors (Ravi owes) | 80 | Profit for the period | 1,200 |
| Total | 1,416 | Total | 1,416 |
The two sides agree because they are built from the same balanced postings.
Opening and closing balances
The photograph at the end of one year is the starting point for the next. Asset, liability and equity balances carry forward as opening balances. Income and expense accounts start again from zero — each year is a new movie.
Common mistake
Counting GST collected as sales, or counting a customer's advance as income. Neither is earned yet: GST is owed to the government, and an advance is owed back to the customer until the goods are billed.
Where you'll use this
In Part 3, a company appointing a stockist asks for the balance sheet (can they invest in stock and credit?) and looks at profit and loss by brand (is this distributorship worth running?). Both are views of the same postings.
Check yourself
- Which report would show how much stock and cash the business had on 31 March?
- Is GST collected on a sale an income?
- Which accounts start from zero in a new year?
Answers
- The balance sheet — a photograph of one day.
- No. It is a liability owed to the government.
- Income and expense accounts.