The Difference Between Profit & Loss Account and Balance Sheet

One of the three financial statements that companies provide on a regular basis is a balance sheet. Another is a profit and loss (P&L) statement. These statements give creditors, market analysts, and investors the means of evaluating the financial strength and growth potential of a company. The third financial statement is called the cash-flow statement.

While the balance sheet and the P&L statement may seem similar at first glance, they serve completely different purposes in understanding your construction business's financial health. Think of them as two different lenses for viewing your company, one shows you what you own and owe right now, while the other shows you how profitable you've been over time.

Table of Content:

• Understanding the Balance Sheet

• Understanding the Profit & Loss Statement

• Key differences between the balance sheet and P&L in a visual way

• Why Both Matter for Construction Companies

• Take Control of Your Construction Finances

Understanding the Balance Sheet

Your balance sheet is like a financial snapshot taken at a specific moment in time. It answers the critical question: "What is my company worth today?" This statement shows three key components:

• Assets: Everything your construction company owns from cash in the bank and accounts receivable to equipment, vehicles, and work-in-progress inventory

• Liabilities: Everything you owe including accounts payable to suppliers, equipment loans, lines of credit, and retention payable

• Equity: What's left over after subtracting liabilities from assets, this represents your true ownership stake in the business

For construction contractors, the balance sheet is particularly important because it reveals your liquidity (can you pay bills this month?) and solvency (is your business financially stable long-term?). Bonding companies and lenders scrutinize your balance sheet before extending credit or issuing performance bonds.

Understanding the Profit & Loss Statement

Your P&L statement tells a different story, it's a movie, not a snapshot. It covers a specific period (monthly, quarterly, or annually) and answers: "How much money did we make or lose during this time?"

The P&L shows:

• Revenue: Income from completed work, progress billings, and change orders

• Cost of Goods Sold (COGS): Direct costs like labor, materials, subcontractors, and equipment rentals

• Gross Profit: Revenue minus COGS, this tells you if your projects are priced correctly

• Operating Expenses: Overhead costs like office rent, insurance, salaries for estimators and project managers

• Net Profit (or Loss): The bottom line after all expenses

For contractors, the P&L reveals whether your projects are profitable, if your overhead is under control, and whether your pricing strategy is working. It's your performance report card.

Key differences between the balance sheet and P&L in a visual way

Why Both Matter for Construction Companies

You can't run a successful construction business by looking at just one of these statements. Here's why you need both:

A contractor might show strong profits on their P&L but have terrible cash flow because customers are slow to pay. The balance sheet would reveal this problem through high accounts receivable. Conversely, you might have a healthy balance sheet with plenty of assets but discover through your P&L that you're losing money on every project.

The balance sheet helps you understand stability, liquidity, and whether you can take on that next big project. The P&L helps you evaluate performance, identify which types of projects are most profitable, and make pricing decisions for future bids.

Using both statements together gives you the complete financial picture. When bonding companies evaluate your firm, they look at both. When banks consider a loan, they analyze both. And when you're making strategic decisions about growth, equipment purchases, or hiring, you should be consulting both.

Take Control of Your Construction Finances

Understanding these financial statements isn't just about satisfying accountants or lenders, it's about running a smarter, more profitable construction business. When you know how to read and use both the balance sheet and P&L statement, you can make better decisions about bidding, cash management, equipment investments, and growth opportunities.

Are you ready to get help, or are you still not sure if you need support to run your construction business? Contact Construction Cost Accounting to have a free 30 minute consultation!