Profit and loss vs balance sheet: the difference, with one business's numbers

Short answer: the Profit and Loss (P&L, also called the income statement) covers a period, such as last month or the year to date. It shows what the business sold, what that cost and what was left, so it tells you whether you made money. The Balance Sheet is a snapshot of one date. It lists what the business has (cash, money customers owe, equipment) and what it owes (supplier bills, GST or VAT, loans), so it tells you what you own and whether you can pay what is due. The two are linked by one line: the P&L’s net profit is added to the Balance Sheet’s equity, which Xero shows as Current Year Earnings. Buying equipment, repaying a loan or taking money out for yourself changes the Balance Sheet and the bank, but not your profit. That is why the two reports can tell very different stories. (In UK accounts the P&L is called the profit and loss account, and the same words on a Balance Sheet mean the profit kept since the company started.)

Side by side

	Profit and Loss	Balance Sheet
Question it answers	Did the business make money?	What does it have and owe, and is it solvent?
Time	A period (a month, a quarter, a year)	One date (for example 30 June)
Main lines	Sales, cost of sales, gross profit, expenses, net profit	Bank, receivables, fixed assets, payables, GST or VAT, loans, equity
Bottom line	Net profit (or loss)	Net assets, which always equal equity
Starts again	Each new period or financial year	Never: balances carry forward
In Xero	Accounting › Reports › Profit and Loss	Accounting › Reports › Balance Sheet
Read it with	The same period last month or last year	The same date a month or a year earlier

Menu names move between Xero releases and differ slightly by region. If a label does not match your screen, search Xero Central for the report name. For a full example P&L with every line explained, see the profit and loss statement example. For a line-by-line walkthrough of each report, see how to read your Profit and Loss in Xero and how to read your Balance Sheet in Xero.

How the two connect

The Balance Sheet always balances: assets minus liabilities equals equity. Equity is what the owners put in, plus profit kept in the business, minus what they took out. So every dollar of net profit on the P&L increases equity on the Balance Sheet. In Xero:

• Current Year Earnings on the Balance Sheet is this financial year’s net profit to date, the same figure as the bottom line of the P&L for the year so far.
• Retained Earnings is the profit from earlier years still in the business. At the start of each financial year, Xero moves the year’s profit from Current Year Earnings into Retained Earnings by itself, so you do not need a closing journal. Retained earnings, with a worked example shows how profit, tax and dividends add up there year by year, and the Xero annual report guide shows both reports run for a full year, with last year alongside.

Profit raises equity. It does not say which asset went up. The profit might be in the bank, in unpaid invoices, in new equipment, or it may already have been taken out as drawings. To see which, you need the Balance Sheet, or the Statement of Cash Flows, which explains the change in the bank between two dates (a worked cash flow statement example builds one from a P&L and two balance sheets).

A worked example: profit up, bank down

These are made-up figures for a small design studio run by a sole trader, for a financial year from 1 July to 30 June. All amounts exclude GST.

Profit and Loss for the year

	$
Sales	240,000
Cost of sales (printing, contractors)	60,000
Gross profit	180,000 (75%)
Wages	110,000
Rent	18,000
Depreciation	6,000
Other expenses	16,000
Net profit	30,000

Balance Sheet at the start and end of the year

	1 July	30 June
Bank	20,000	9,000
Accounts Receivable	18,000	32,000
Equipment, after depreciation	24,000	28,000
Total assets	62,000	69,000
Accounts Payable	8,000	10,000
GST owed	5,000	5,000
Business loan	15,000	10,000
Total liabilities	28,000	25,000
Net assets	34,000	44,000
Owner’s capital	1,000	1,000
Retained Earnings	33,000	33,000
Current Year Earnings	0	30,000
Owner’s drawings	0	−20,000
Total equity	34,000	44,000

The P&L says a good year: $30,000 profit on a 75% gross margin. The Balance Sheet says the bank fell from $20,000 to $9,000. Both are right. Here is where the $30,000 went:

	$
Net profit	30,000
Add back depreciation (an expense, but no cash left the bank)	+6,000
Customers owe more than a year ago (32,000 − 18,000)	−14,000
Suppliers are owed more (10,000 − 8,000)	+2,000
New equipment bought (on the Balance Sheet, not the P&L)	−10,000
Loan repaid (15,000 − 10,000)	−5,000
Owner’s drawings	−20,000
Change in the bank	−11,000

How to read it:

• The biggest drain is the owner’s drawings. $20,000 was taken out against $30,000 of profit, which is fine on its own. But the profit was not all in the bank, so the drawings came partly out of the opening balance. The how much can I pay myself guide shows how to size drawings from cash, not profit.
• $14,000 of profit is sitting in unpaid invoices. Receivables went from $18,000 to $32,000. That is cash the business has earned but not collected. The debtor days calculator shows how many days customers are taking to pay.
• Equipment and loan repayments never touch the P&L. The $10,000 of equipment shows up there only as depreciation, a slice each year. The $5,000 loan repayment does not appear at all (only the interest would, inside other expenses; loan repayments in Xero shows how to split them).
• Equity still went up by $10,000 (30,000 profit − 20,000 drawings), so the business is worth more on paper even though the bank is lower. That is normal for a growing business, but with $9,000 in the bank against $15,000 of bills and GST due soon, it now depends on collecting those invoices. The working capital calculator turns these lines into a current ratio and a quick ratio.

If this pattern looks familiar, profit in Xero but no cash in the bank goes through the usual causes in more detail.

What shows up where

What happened	Profit and Loss	Balance Sheet
You send an invoice (accrual basis)	Sale, now	Receivable until it is paid
A customer pays that invoice	Nothing	Receivable down, bank up
You buy a van or a laptop to keep	Only depreciation, spread over years	Fixed asset, bank down or loan up
You take out or repay a loan	Only the interest	Bank and loan
You take money out as owner (drawings or dividends)	Nothing	Equity and bank down
You collect GST or VAT on a sale	Nothing (sales are shown without it)	GST or VAT owed until you pay it
You buy stock you have not sold yet	Nothing yet, if stock is tracked on the Balance Sheet	Stock asset
You pay wages	Expense	Bank down (and PAYE or PAYG owed until paid)

On a cash-basis P&L, a sale counts only when the customer pays, so the first two rows merge. Cash vs accrual in Xero explains when to use each.

Which one to open for which question

• “Am I making money?” Profit and Loss, this month against the same month last year.
• “Why is my bank balance lower than my profit?” Balance Sheet at two dates, or the Statement of Cash Flows.
• “Can I pay the bills due soon?” Balance Sheet: bank plus receivables against payables, GST or VAT and wages owed.
• “Is the business worth more than a year ago?” Balance Sheet: net assets at two dates.
• “How long will my cash last?” Neither on its own. Take the bank from the Balance Sheet and your monthly costs from the P&L, and the free cash runway calculator does the sum.

Common questions

What is the main difference between a profit and loss and a balance sheet? The profit and loss shows income, costs and profit over a period of time. The balance sheet shows what the business owns and owes on a single date. The first tells you if you made money, the second what you have to show for it.

How does the profit and loss affect the balance sheet? Net profit for the period is added to equity on the balance sheet. In Xero it appears as Current Year Earnings, and at the start of the next financial year Xero moves it into Retained Earnings.

Why is my profit different from my bank balance? Because many things change the bank without touching profit: customers who have not paid yet, equipment bought, loan repayments, GST or VAT collected and owner drawings. Depreciation does the opposite and lowers profit without any cash leaving.

Is the balance sheet or the profit and loss more important? Neither on its own. A business can show a profit and still run out of cash, which only the balance sheet reveals, and a healthy balance sheet can hide a business that is losing money every month, which only the profit and loss reveals. Read the profit and loss monthly and the balance sheet at least monthly alongside it.

Do drawings or dividends appear on the profit and loss? No. Money the owner takes out as drawings or dividends is a reduction in equity on the balance sheet, not an expense. Wages paid to a director through payroll are an expense.

Is the income statement the same as the profit and loss? Yes. Income statement, profit and loss, P&L and statement of financial performance are names for the same report. Xero calls it Profit and Loss.

Both reports in one email

ReportPilot reads your Xero figures and sends a short email every Monday in plain English that covers both sides: sales and profit against last month and the same month last year (the P&L view), and cash in the bank against the end of last month, money owed to you that is past due and bills due in the next two weeks (the Balance Sheet view). It asks Xero for read-only access, and there is a 14-day free trial with no card.