Bookkeeping Basics · Lesson 5
P&L, balance sheet,
and cash flow.
Three reports, three different questions. Learn what each one answers, why profit and cash are not the same, and how all three tie back to a single ledger.
Three reports tell you almost everything about a business, and once you know what each one answers, they stop being intimidating spreadsheets and start being a story. The trick is that they answer different questions, and reading them together is what gives you the full picture.
- Profit & loss: did we make money over a period? (A film of the month.)
- Balance sheet: what do we own and owe right now? (A photograph on one date.)
- Cash flow: where did the actual money go? (Following the cash, not the profit.)
The P&L and cash-flow statements cover a period of time. The balance sheet is a snapshot at a single moment, the last day of that period.
All three are read straight off the same double-entry ledger you met in lesson one. Nothing is typed twice; change a transaction and every statement updates together. We will read July for Meridian Trading Co.
Statement 1
Profit & loss: did we make money?
The P&L (also called the income statement) works top to bottom. Start with revenue, subtract the direct cost of what you sold to get gross profit, then subtract the running costs to reach net profit, the bottom line.
In July, Meridian earned $312,800 in revenue. Cost of goods sold was $164,200, leaving $148,600 of gross profit, a healthy 47% gross margin. After $61,400 of operating expenses and $13,800 of payroll, net profit was $73,400. That is the number that tells you the business model works.
- Gross profit shows whether your pricing beats your direct costs.
- Net profit shows whether the whole operation, overheads and all, makes money.
Statement 2
Balance sheet: what do we own and owe?
The balance sheet is the accounting equation from lesson one, made visible on one date: Assets = Liabilities + Equity. It lists what the business controls, what it owes, and what is left over for the owners.
On 31 July, Meridian holds $1,204,800 of assets ($486,200 cash, $318,600 owed by customers, $400,000 of inventory). It owes $392,400 (suppliers, VAT, and loans). The difference, $812,400, is equity, the owners' stake. The two sides balance to the penny, because every entry behind them was itself balanced.
Revisit lesson 1: the equation →Statement 3
Cash flow: where did the money actually go?
Here is the statement that catches people out. Meridian made $73,400 of profit in July, but its cash only rose by $35,200. Why the gap? Profit includes an invoice that has not been paid yet, while cash also reflects a $18,000 van bought outright and a $9,100 loan repayment, neither of which is an expense on the P&L.
The cash-flow statement splits movement into three buckets: operating (the day-to-day trade, $62,300 in), investing (buying assets like the van, $18,000 out), and financing (loans and owner funds, $9,100 out). Opening cash of $451,000 plus a net $35,200 lands at $486,200, the exact figure sitting on the balance sheet.
See reports & dashboards →How the three fit together
They are not three separate documents; they are three views of one ledger, and they tie to each other. The net profit from the P&L flows into equity on the balance sheet. The closing cash on the cash-flow statement is the same cash figure on the balance sheet. Read one in isolation and you get a partial answer. Read all three and you can tell whether a business is profitable, solvent, and liquid, three different kinds of healthy.
The one-glance health check
Profitable but out of cash? Look at receivables on the balance sheet, customers are paying too slowly. Cash-rich but unprofitable? You may be living off a loan (financing) rather than trade. Growing profit and growing cash from operations together is the combination you want.
P&L = performance
Over a period, did revenue beat costs? Track gross margin and net profit month over month to see the trend.
Balance sheet = position
On one date, what do you own and owe? A strong balance sheet means you can absorb a slow month.
Cash flow = survival
Profit is an opinion; cash is a fact. This statement shows whether the money to keep going is actually there.
Frequently asked questions
What is the difference between the P&L and the balance sheet?
The profit and loss statement covers a period of time and answers whether you made money. The balance sheet is a snapshot on a single date and answers what you own and owe. Net profit from the P&L flows into equity on the balance sheet.
Why is my profit different from my cash balance?
Profit is recorded when revenue is earned and costs are incurred, regardless of when cash moves. Cash also reflects things that are not expenses, like buying equipment or repaying a loan, and excludes unpaid invoices. The cash-flow statement explains the gap.
What are the three parts of a cash-flow statement?
Operating (cash from day-to-day trade), investing (buying or selling long-term assets like equipment), and financing (loans, repayments, and owner funds). Add them to your opening cash and you get your closing cash, which matches the balance sheet.
Do I have to build these statements myself in Vinance?
No. All three are generated live from your double-entry ledger, so they are always in sync with your latest transactions. You can drill from any figure down to the underlying entries, and there is no separate close-the-model step.
Move your books off the spreadsheet.
Invoices to bank feeds, payroll to financial statements. One platform, priced by the company and not the seat, on web and desktop.
All modules included · Real double-entry books · Explore a seeded sample company in one click