What's the difference between a profit and loss statement and a balance sheet?
A profit and loss statement covers a period of time. A balance sheet is a snapshot of one day. IRS Publication 583 puts it in a sentence each: an income statement shows the income and expenses of the business for a given period, and a balance sheet shows the assets, liabilities and your equity in the business on a given date.
So the profit and loss statement tells you whether October made money. The balance sheet tells you where things stood when October ended: the cash in the bank, what customers still owe you, what's left on the truck loan and what's sitting on the cards. The table puts the two side by side.
| Question | Profit and loss statement | Balance sheet |
|---|---|---|
| Time it covers | A period, such as one month | One date, such as the last day of the month |
| Main sections | Income and expenses | Assets, liabilities and owner's equity |
| What it answers | Did the business make money in that period? | What does the business own and owe on that date? |
| Bottom line | Net profit or net loss | Equity, what's left once debts are counted |
| At the end of the tax year | Income and expense accounts close and start again | Asset, liability and equity accounts stay open |
| A monthly loan payment | Shows the interest as an expense | Shows the lower loan balance |
| A withdrawal for personal use | Doesn't appear | Lowers owner's equity |
The year-end row comes from the same publication: income and expense accounts close at the end of each tax year, while asset, liability and net worth accounts stay open permanently. That is why the balance sheet carries your history.
Why can the books show a profit when the bank account looks thin?
Because profit and cash are different numbers, and the gap between them lives on the balance sheet. If your books record a sale when you send the invoice, that sale counts as income the day it's billed, even if the customer pays in sixty days. The money owed shows up as a receivable, and if late payers are the usual cause, accounts receivable tracking is the part of the books to watch.
Equipment works the same way. A new trailer or a set of tools is usually recorded as an asset, not as one big expense in the month you paid, and Publication 583 notes that you need records of business assets to figure their annual depreciation. The principal part of a loan payment reduces what you owe rather than your profit. Money you take out for yourself, which the IRS publication describes as a withdrawal from the business for personal use, lowers your equity, not your profit.
It runs the other way too. A healthy bank balance can sit beside a month that lost money, when a big customer finally paid an old invoice or loan money has just landed in the account.
Which three lines should a Herriman owner read each month?
Net profit, cash and total liabilities, read in that order once the month is closed.
- Read net profit on the profit and loss statement and compare it with the same month last year as well as with last month.
- Read cash on the balance sheet and check that it equals the reconciled bank balance for the last day of the month.
- Read total liabilities on the balance sheet, so card balances, loans and money held for someone else are counted before you spend.
Comparing with the same month last year matters for any business with a busy season, because a quiet month can look bad next to a busy one. Cash comes second because it tests everything else: if it disagrees with the bank, something upstream is wrong, and the profit figure probably is too.
What does a growing Herriman business add to its balance sheet?
Herriman's economic development page calls the city one of the fastest-growing communities in Utah, and lists fast-track permitting among the things its Economic Development Department offers. For a local business, growth tends to reach the balance sheet before it reaches the profit line: a work vehicle, a loan to pay for it, a second card for a new hire.
Hiring is the clearest case. Herriman's start-up guide lists what a business with employees may need, including an EIN from the IRS for federal withholding and FUTA payments, registration with the Utah State Tax Commission to remit state taxes withheld from payroll, state unemployment insurance and workers' compensation insurance. Tax withheld from a paycheck isn't the business's money. The IRS trust fund recovery penalty page says withheld income and employment taxes are called trust fund taxes because you hold the employee's money in trust until you make a federal tax deposit in that amount. Until then it belongs on the balance sheet as something owed, and an owner who only reads profit can easily mistake it for spare cash.
Moving matters too. The city's licenses page says businesses operating in Herriman are generally required to hold a valid city business license, and it covers moving to a new location as well as opening and renewing. A move usually brings a deposit and new equipment, and both belong on the balance sheet rather than buried in a single month's expenses.
Not sure your reports are right?
Start with a free call with Cara, and Inkdrop will quote once it's clear how many accounts and transactions you have.
What if the balance sheet doesn't add up?
It always has to balance: assets equal liabilities plus equity. Publication 583 describes net worth as the excess of assets over liabilities, and in a double-entry system it says total debits must equal total credits. If they don't, there's an error to find and correct.
If your software keeps those totals equal automatically, the warning signs are quieter. Look for a cash figure that doesn't match the bank statement, a negative balance in an account that can't go negative, a loan balance that never falls even though you pay it every month, or a growing pile in an uncategorized account.
Any of those means the profit figure is suspect as well, because the same entries feed both reports. When it's been going on for months, the usual fix is to rebuild the books in order from the bank and card statements, oldest month first. Books in that state are what catch-up bookkeeping is for.
Where does Inkdrop fit for Herriman owners?
Inkdrop Bookkeeping is based in West Jordan, in the same county as Herriman, and is available to owners anywhere in Utah, remotely by phone and email. Our services include monthly bookkeeping and monthly financial reports.
There's more about bookkeeping for Herriman businesses on our Herriman page. To talk through your own numbers, call (801) 448-3672 or use the contact form.
