Profit & margins
P&L vs balance sheet
A profit and loss statement (P&L) shows revenue, costs and profit over a period, such as a month. A balance sheet shows what the business owns and owes at a single point in time. The P&L tells you whether you made money; the balance sheet tells you where the money is, including how much is tied up in inventory.
P&L vs balance sheet: comparison table
| P&L (income statement) | Balance sheet | |
|---|---|---|
| Covers | A period: a month, quarter or year | A single date |
| Shows | Revenue, costs and profit | Assets, liabilities and owner's equity |
| Core equation | Revenue − Expenses = Profit | Assets = Liabilities + Equity |
| Answers | Did we make money? | What do we own and owe? |
| Inventory appears as | Cost of goods sold, when it sells | An asset, while it's unsold |
| Typical use | Pricing, costs, margin trends | Cash, debt, working capital |
The two are linked: each period's net profit adds to the owner's equity on the balance sheet.
Profit and loss vs balance sheet: where inventory shows up
Inventory is where the two statements matter most for an online store. It starts on the balance sheet and only moves to the P&L when it sells.
Worked example: buying and selling stockExample numbers
Step 1: you buy $30,000 of stock.
- Balance sheet: cash falls by $30,000, inventory rises by $30,000.
- P&L: no change. Nothing has been sold yet.
Step 2: during the month, you sell products that cost $19,000.
- P&L: $19,000 of cost of goods sold, against the revenue from those sales.
- Balance sheet: inventory falls by $19,000. The remaining $11,000 of stock stays as an asset.
This is why a store can report a healthy profit and still be short of cash. In the month above, the P&L only shows the $19,000 of stock that sold, but $30,000 of cash went out the door.
Cash Tied Up in Inventory CalculatorHow many days your cash sits as inventory before it becomes cash again.What each statement is good for
Use the P&L to:
- track gross, operating and net margins
- see which costs are growing faster than sales
- decide on pricing, discounts and ad budgets
Use the balance sheet to:
- see how much cash is tied up in inventory
- track what you owe suppliers, lenders and tax authorities
- judge whether the business can fund its next stock order
A simple monthly routine
- Close the P&L once costs for the month are in. The P&L guide has a free template.
- Check inventory on the balance sheet. If it's growing faster than sales, cash is piling up in stock. The guide to days inventory outstanding shows how to measure it.
- Compare profit with the change in cash. If profit is positive but cash fell, find out where it went, usually inventory or debt repayments.
For the profit levels on the P&L, see gross profit vs net profit.
FAQ
Is the income statement the same as a P&L?
Yes. Income statement, profit and loss statement and P&L all mean the same report: revenue, costs and profit over a period.
Why is my store profitable but low on cash?
Usually because cash went into inventory or other assets, which show on the balance sheet, not the P&L. A big stock purchase reduces cash immediately but only becomes COGS on the P&L as the stock sells.
Where does unsold inventory appear?
On the balance sheet, as a current asset at cost. It moves to the P&L as cost of goods sold only when it's sold.
Do I need both statements?
Yes, if you want the full picture. The P&L shows whether you're making money; the balance sheet shows what you own and owe, including how much cash is tied up in stock.