Profit & Loss Statement; Balance Sheet; Trial Balance - what do they all mean?

A Profit & Loss Statement (P&L) is a summary of all the income and expenses for a business over a given period of time. At the end of a period a profit or loss for the business is calculated by deducting total expenses from total income. The period in question can be any length of time but is typically a month, a quarter of a year (3 months) or a full year. Both income and expenses can be shown listing the amounts for each account or else in summary form. A P&L not only reports whether a business is profitable or not but a detailed P&L can indicate why a certain result is achieved. The amount for each type of income and each type of expense can be compared to a standard. The standard may be a budget or a financial ratio or an industry comparison. These concepts will be dealt with later in the series.

A balance sheet (BS) shows the assets, liabilities and equity of a business at a particular point in time. Again the point in time can be any day but is typically reported at the end of a month, a quarter or a year. A BS shows at any point in time what the business owns (assets), what the business owes to others (liabilities) and the net position of the business (equity). The balance sheet equation can be represented by:

Assets – Liabilities = Equity

In other words if total assets is greater than total liabilities then the owners of the business have positive equity or positive ownership in the business.

A trial balance is a listing of all transaction accounts (income, expenses, assets, liabilities and equity), their balances at a particular point in time and whether the balances are debits (Dr) or credits (Cr). A trial balance, as its name suggests, will always have an equal balance of Dr and Cr.

General ledger, debtors ledger, creditors ledger

The General Ledger (GL) is a list of all the transactions, by account name, entered over a period of time. The GL contains all the transactions of a business and is used to examine the detail in a particular income, expense, asset or liability account.

The Debtors ledger and Creditors ledger are types of subsidiary ledger. They are so called because they are subsidiaries or part of the GL. The debtors ledger, also called the accounts receivable (AR) ledger, details all customers who owe money to the business. Details include all sales made, all payments received and the balance owed by each customer at any point in time.

Conversely, the creditors ledger, also called the accounts payable (AP) ledger, details all suppliers to whom the business owes money. Details include all purchases made, all payments paid and the balance due to each supplier at any point in time.

Mitchell Holmes CPA is based in Cairns, Australia and is owner of management consulting website http://www.fixmybusiness.com.au and online accessories store http://www.sublimeaccessories.com

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