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The P&L reports profit over a period, while the balance sheet reports balances at a date. Work the same distributor transactions through both statements and reconcile profit, retained earnings and cash.
A P&L balance sheet comparison connects profit earned during a period with the assets, liabilities and equity reported at its end. The P&L answers whether the company earned a profit; the balance sheet shows what resources and obligations remain after those transactions.
Start with the period's net income and reconcile it to retained earnings. Then explain the cash movement separately: a profit is not a cash receipt.
The SEC's financial statement guide distinguishes income over a period from financial position at a date. For monthly reporting, compare September's P&L with the movement between the August 31 and September 30 balance sheets.
| Question | P&L or income statement | Balance sheet |
|---|---|---|
| What does it measure? | Revenue, expenses and profit during a period | Assets, liabilities and equity at a date |
| What is the time reference? | A month, quarter or year | The closing date |
| Where does an unpaid customer sale appear? | Revenue when recognition requirements are met | Receivables until collected |
| Where does equipment appear? | Depreciation expense over its useful life | The asset's remaining carrying amount |
| Where does borrowing appear? | Interest expense as applicable | Outstanding debt and the related cash balance |
| What must reconcile? | Revenue less expenses equals net income | Assets equal liabilities plus equity |
The existing profit and loss example explains individual P&L lines. Here the job is to carry those results into the balance sheet without treating every balance movement as income or expense.
Consider an illustrative US distributor for September 2026. It has no other comprehensive income, share transactions, asset disposals or direct retained earnings adjustments. All amounts are whole USD, with expenses displayed as positive amounts in the P&L.
Its period activity is below. The company recognizes all sales on credit, buys inventory on account and pays all interest and income tax expense in the month. Other operating expense excludes depreciation.
| Activity | Amount (USD) | P&L effect | Balance sheet effect before closing profit |
|---|---|---|---|
| Credit sales recognized | 500,000 | Revenue increases | Receivables increase |
| Customer collections | 460,000 | None | Cash increases; receivables decrease |
| Inventory purchases | 330,000 | None when purchased | Inventory and payables increase |
| Cost of inventory sold | 300,000 | Cost of goods sold increases | Inventory decreases |
| Supplier payments | 310,000 | None on payment | Cash and payables decrease |
| Other operating expense paid | 100,000 | Expense increases | Cash decreases |
| Depreciation | 20,000 | Expense increases | Net equipment decreases |
| Interest expense paid | 10,000 | Expense increases | Cash decreases |
| Income tax expense paid | 20,000 | Expense increases | Cash decreases |
| Equipment bought for cash | 50,000 | None immediately | Cash decreases; equipment increases |
| Cash borrowing | 100,000 | None | Cash and debt increase |
| Dividends declared and paid | 15,000 | None | Cash and retained earnings decrease |
The timing distinction matters. Collecting a receivable changes cash and receivables without recognizing the sale again. Paying the supplier reduces a liability; the related expense appears when inventory is sold under the example's assumptions.
Only the income and expense rows enter this statement.
| September P&L line | Calculation | Amount (USD) |
|---|---|---|
| Revenue | Credit sales recognized | 500,000 |
| Cost of goods sold | Inventory sold at cost | 300,000 |
| Gross profit | 500,000 - 300,000 | 200,000 |
| Other operating expense | Expense recognized and paid | 100,000 |
| Depreciation | Period depreciation | 20,000 |
| Operating profit | 200,000 - 100,000 - 20,000 | 80,000 |
| Interest expense | Period interest | 10,000 |
| Pretax profit | 80,000 - 10,000 | 70,000 |
| Income tax expense | Period tax | 20,000 |
| Net income | 70,000 - 20,000 | 50,000 |
Neither the $100,000 loan nor the $15,000 dividend enters net income. Equipment purchases also do not become an immediate $50,000 expense in this example; the separate depreciation row recognizes the period's use of equipment.
Apply each transaction to the opening balance. Receivables rise by $500,000 - $460,000 = $40,000. Inventory rises by $330,000 - $300,000 = $30,000, while payables rise by $330,000 - $310,000 = $20,000.
| Balance sheet line | August 31 (USD) | September movement (USD) | September 30 (USD) |
|---|---|---|---|
| Cash | 200,000 | 55,000 | 255,000 |
| Trade receivables | 300,000 | 40,000 | 340,000 |
| Inventory | 400,000 | 30,000 | 430,000 |
| Equipment, net | 600,000 | 30,000 | 630,000 |
| Total assets | 1,500,000 | 155,000 | 1,655,000 |
| Trade payables | 250,000 | 20,000 | 270,000 |
| Debt | 500,000 | 100,000 | 600,000 |
| Total liabilities | 750,000 | 120,000 | 870,000 |
| Contributed capital | 400,000 | 0 | 400,000 |
| Retained earnings | 350,000 | 35,000 | 385,000 |
| Total equity | 750,000 | 35,000 | 785,000 |
| Liabilities plus equity | 1,500,000 | 155,000 | 1,655,000 |
Net equipment is $600,000 + $50,000 - $20,000 = $630,000. For cash, combine every cash-bearing row: $460,000 - $310,000 - $100,000 - $10,000 - $20,000 - $50,000 + $100,000 - $15,000 = $55,000 added to opening cash.
Both balance sheets balance. The movement also balances: assets increase $155,000, funded by $120,000 more liabilities and $35,000 more equity. Use flux analysis to investigate the account movements once this basic tie is complete.
For this example:
Closing retained earnings = Opening retained earnings + Net income - Dividends
350,000 + 50,000 - 15,000 = 385,000
Retained earnings increased by $35,000, while the P&L earned $50,000. The $15,000 difference is the distribution to owners.
Keep other equity captions separate. Regulation S-X Rule 3-04, applicable to relevant SEC filings, calls for a beginning-to-ending reconciliation of equity captions with significant items identified and owner contributions and distributions shown separately. That is also a useful structure for a management reporting check.
If current-year earnings appear separately on your report, combine them with accumulated retained earnings for the comparison without adding the same profit twice. Confirm how the ledger's closing process presents the result before treating a caption difference as an error.
Operating cash is customer collections less supplier payments and the cash expenses listed above: $460,000 - $310,000 - $100,000 - $10,000 - $20,000 = $20,000.
It also reconciles from net income:
Operating cash flow = 50,000 + 20,000 depreciation - 40,000 receivables growth - 30,000 inventory growth + 20,000 payables growth = 20,000
Then subtract equipment spending of $50,000, add borrowing of $100,000 and subtract dividends of $15,000. The result is the $55,000 cash increase. The working capital guide explains the operating balance movements in more depth.
Once the statements reconcile, a P&L dashboard can present the recurring measures. The profit and loss management guide covers how managers use those results; neither replaces the accounting bridge.
Upload the period P&L, opening and closing balance sheets, and equity movement support to Covirage. Covirage maps the columns, its tools compute and check the bridges, and the external AI model explains the movements with every figure traced to its rows. Create a free Covirage account and bring a sample of your own statements.
See financial planning and reporting for the reporting context.
No. A profit and loss statement reports activity during a period, including revenue and expenses. A balance sheet reports balances at a specific date, including cash, receivables, inventory, debt and equity. Use matching periods when comparing them.
Profit contributes to retained earnings after the closing process. Some reporting systems show current-year earnings separately until year-end. Include that amount once in the equity reconciliation, and account separately for dividends and any approved direct retained earnings adjustments.
Customers may not have paid, inventory may have increased, or the company may have bought equipment or repaid debt. Those cash movements differ from recognized revenue and expenses. Reconcile operating balances and investing and financing activity before interpreting the cash change.
Only when no other equity movements occur. Dividends, capital contributions, share repurchases, other comprehensive income and certain adjustments can change equity separately from net income. Reconcile each equity caption rather than assuming total equity moves only with profit.