The purpose of financial accounting is to show the financial position of a business at a particular point in time and demonstrate how that business has performed over a specific period. The two main financial accounting statements that help achieve this aim are:
- The profit and loss account (or income statement) for the reporting period
- A balance sheet for the business at the end of the reporting period
A balance sheet shows, at a particular point in time, what resources are owned by a business, its assets, and what it owes to other parties, its liabilities. It also shows how much has been invested in the business and what the sources of that investment were. It can be helpful to think of a balance sheet as a “snap-shot” of the financial position of the business at a specific point. While this is a useful picture, every time an accounting transaction takes place the picture will have changed.
By contrast, the profit and loss account provides a perspective on a longer time-period. If the balance sheet is a snapshot of the business then the profit and loss account is a sequence of pictures capturing the business’ activities over time. These sequenced “snap-shots” detail what financial transactions took place in a particular period and what the overall result of those transactions was.
Ultimately the profit and loss account measures the company’s sales revenue, turnover or income, against its expenses, costs, for the period being measured.