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Two of the most important financial statements in financial accounting, the balance sheet and income statement (also called the profit and loss statement, or P&L), have become crucial analytic tools for investors when reviewing a company. Most of the same types of information – including revenues, expenses, and profits – appear on each, but there are important differences between each as well.

The primary difference between the profit and loss statement and the balance sheet involves their respective treatments of time. The balance sheet summarizes the financial position of a company for one specific point in time. The P&L statement shows revenues and expenses during a set period of time. The length of the period of time covered in the P&L statement may vary, but common intervals include quarterly (three months) and annual statements.

Each document is built for a slightly different purpose. The P&L statement answers a very specific question: Is the company profitable? The income statement is more focused than either the cash flow statement or the balance sheet.

The name "balance sheet" is derived from the way that the three major accounts eventually balance out and equal each other; all assets are listed in one section, and their sum must equal the sum of all liabilities and the shareholders' equity. Balance sheets are built more broadly, revealing what the company owns and owes, as well as any long-term investments. Unlike an income statement, the full value of long-term investments or debts appear on a balance sheet.

While a profit and loss statement shows net income (whether or not a company is in the red or black), the balance sheet shows how much a company is actually worth. Though both of these are a little oversimplified, this is often how the P&L statement and the balance sheet tend to be interpreted by investors or lenders.

The income statement requires only one simple set of calculations. Accountants add up the company's revenue on one portion and add up all of its expenses on another. The total expenses are subtracted from the total revenue, returning a profit or a loss. The balance sheet has a few different calculations that are all performed as representations of one basic formula: assets equal liabilities plus owner's equity.

When used together along with other financial documents, these two statements can be used to assess the operational efficiency, year-to-year consistency, and organizational direction of a company. For this reason, the numbers for each document are scrutinized heavily by investors and by the business's own executives. While the presentation of these statements varies a little from industry to industry, large discrepancies between the yearly treatment of either document is often a red flag.

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