The balance sheet and profit & loss (P&L) account provide important records of your limited company’s finances. Both contain similar financial information, but there are key differences between the two, and each one offers a distinct overview of your company’s financial position.
In this article, we look at what these fundamental accounting documents mean in practice for small limited companies.
If you run a small limited company, understanding how these documents work is particularly important when managing your obligations to HMRC, applying for finance, or tracking your company’s performance over time.
Even if you use an accountant or accounting software, having a basic grasp of what these statements show can help you make better business decisions.
Balance sheet
The balance sheet provides a snapshot of what a business owes and owns in terms of assets and liabilities. It also includes details of shareholders’ equity and the amount currently invested by one or more individuals.
The balance sheet:
Shows how assets are being financed – either through equity or debt under liabilities.
Helps potential investors and creditors understand how efficiently the company is using its resources.
Assets
Current assets include:
Cash
Money owed by clients (debtors)
Equity and debt securities
Inventory (goods or items you have for sale)
Non-current (tangible or intangible) assets include:
Equipment
Machinery
Property
Goodwill
Copyright
Patents
Liabilities
These are company debts, which may include:
Long-term bank loans or overdrafts
Wages
Rent
Tax
Utilities bills
Dividends payable
Shareholders’ equity
This is calculated as:
Assets – Liabilities = Shareholders’ Equity
It represents the net value of the company and includes:
The amount that would be returned to shareholders if the company were liquidated
Retained earnings (profits not paid as dividends but used to reinvest or reduce debt)
Don’t confuse the balance sheet with a trial balance sheet.
A trial balance is an internal report that lists all general ledger balances.
It is used to prepare the balance sheet, but not shared with external stakeholders.
Usually, this report stays within the accounting department or is generated by accounting software.
More background on the trial balance is available from Investopedia.
P&L account
The P&L account (or income statement) summarises the trading results for a company over a specific time period – typically a fiscal quarter or full year.
It includes:
Revenue
Expenses incurred
Outgoings and operational costs
Most small companies prepare their P&L accounts using accrual accounting, meaning income and costs are recorded when earned or incurred, not when cash is received or paid. This offers a clearer picture of actual business activity during the period.
The P&L reveals whether the business has made a profit or a loss during that period.
Note:
Income not generated through trading (e.g. grants, bank loans) is not shown in the P&L.
Such income is instead recorded in the balance sheet.
What’s the difference between a balance sheet and a P&L account?
Here’s a simple comparison:
The balance sheet shows what the company owns and owes at a specific point in time.
It includes long-term assets and liabilities.
It provides a static view of the company’s net worth.
The P&L account shows the company’s performance over a period.
It reflects how much profit (or loss) the company made after subtracting costs from revenue.
It highlights where profits may be falling or where revenues are strong.
By reviewing the P&L regularly, small companies can:
Identify cost-saving opportunities
Monitor financial performance
Plan to grow profits more strategically
Where does cash flow come in?
Alongside the balance sheet and P&L, companies must also produce a cash flow statement.
This document:
Tracks actual cash movement in and out of the business during a period
Helps identify liquidity issues
Doesn’t consider future income or outgoing obligations
Cash flow is often cited as one of the biggest reasons small businesses fail. Even if your company is profitable on paper, a lack of working capital can quickly lead to problems.
Regularly reviewing your cash flow helps avoid surprises and ensures you can meet short-term obligations, such as payroll, tax bills, and supplier payments.
How important are accounting documents for contractors?
For limited company contractors, these documents typically serve specific purposes:
They must be submitted annually to Companies House and HMRC as part of your legal duties – see our guide on filing annual accounts.
You may also need them to:
Secure a mortgage (some lenders require 2–3 years of company accounts as income proof)
Support applications for business finance or leasing
Some contractors also find that understanding these documents can help when negotiating contracts or daily rates, especially when clients require evidence of business stability or past performance.
In broader business contexts, all three documents – P&L, balance sheet and cash flow statement – are critical for:
Tracking performance
Making informed management decisions
Attracting investment
Securing loans or credit
These financial statements help investors, lenders, and company owners assess how efficiently the business is run and whether it is in a healthy financial position.
