Balance Sheet & Profit & Loss Account: What Everyone Should Know

You don’t need to hire an accountant to know how to keep track of your finances. However, if you own a business, have a side hustle, or wish to be more in control of your finances, you need to know your Balance Sheet and Profit & Loss Account (P&L).

Let’s simplify it.

What is a Profit & Loss Account (P&L)

Income Statement is another name for a Profit and Loss (P&L) Account. It tells you your business’s:

How much have I earned, how much have I spent and what’s the remaining amount?

It consists of:

• Revenue/Sales : All income generated from the sale of products or offered services.
• Cost of Goods Sold (COGS) : Direct expenses like raw materials or products to be sold.
• Gross Profit = Revenue – COGS
• Operating Expenses : Includes but is not limited to: rent, salary, utilities, marketing, and other administrative expenses.

Net Profit (or Loss) = Gross Profit – Expenses

➕ If the result is positive: you have a profit.

➖ If the result is negative: you are in a loss.

Why it is important: It helps you analyze whether your business is making a profit, whether it is in need of cost control or expenses, and whether it can scale.

Explaining Balance Sheet

It is a snapshot of the business’s finances and provides a clear overview of the business’s financial standing.

What do I own, what do I owe, and what’s my net worth?

It comprises of three parts:

• Assets (What you own): Includes cash, stock, machinery, bank deposits, and receivables.
• Liabilities (What you owe): Covers outstanding loans, credit card debt, unbilled services, and payables.
• Equity (Your net worth) : What’s left after subtracting liabilities from assets.

Why it matters:It tells you how stable, solvent, and investable your business is. If liabilities are more than assets, it’s a warning sign.

Why Should Everyone Understand This?

• Make better decisions
• Spot financial red flags early
• Save, invest, or grow wisely
• Speak confidently to banks, investors, or partners

Final Tips:

• Look at your P&L monthly and Balance Sheet quarterly.
• Keep it simple — use software
• Don’t ignore small expenses — they add up.
• Get help from an accountant once a year, but don’t hand over full control blindly.

Finance isn't about being perfect. It's about being aware. And these two statements — the Balance Sheet and P&L — are your most powerful tools.