Your Monthly Profit and Loss and Balance Sheet, Read Together

At the end of each month of bookkeeping, two reports tell you what happened: a profit and loss and a balance sheet. Each one answers a different question about your business. Read side by side, the second report explains a lot of what the first one leaves out.

The profit and loss covers the month

The profit and loss, also called the income statement, covers a stretch of time. In Intuit’s words, it “summarizes the total income and expenses of your business,” and what’s left after the expenses come off is your net income, or your net loss if expenses were bigger. Run it for October and you’re looking at October only.

That makes it the report for how the month went. What the profit and loss can’t tell you is how much money you have, and that gap is where the second report comes in.

The balance sheet covers one day

The balance sheet doesn’t cover a stretch of time at all. Intuit describes it as “a financial snapshot of your company as of a specific date,” and for a monthly report that date is the last day of the month. It lists what the business has, which are its assets, such as the money in your bank accounts and what customers still owe you. It lists what the business owes, which are its liabilities, such as a loan or a credit card balance. What’s left over is equity, and the report always balances: assets minus liabilities equals equity.

The balance sheet also doesn’t start over each month. Intuit calls it “a cumulative report that carries a beginning balance,” so a loan you took out two years ago is still on it today, at whatever you still owe. If you’d like a closer look at the parts of this report on their own, our balance sheet guide walks through each one.

Where the two reports meet

The two reports are linked by one number. Intuit notes that on the balance sheet, “the total for equity includes your company’s net income for the fiscal year to date,” which covers every month of your business year so far, not only the latest one. The profit the business earns doesn’t disappear once the month ends. It moves into equity on the balance sheet and builds there through the year.

Because the two reports measure different things, they can seem to disagree. Your profit and loss can show a good month while your bank balance barely moves or even drops. That doesn’t have to mean something is wrong. Some of the things that move your cash never touch the profit and loss, and when they don’t show up there, they show up on the balance sheet.

Why profit and cash do not always match

Three situations show how cash and profit can move apart.

A loan payment. When a loan payment includes interest, only the interest is an expense. In QuickBooks, Intuit has each loan payment recorded against the loan itself and each interest payment recorded as an expense. The interest lowers your profit, while the rest lowers what you owe on the balance sheet. Your bank account pays the whole amount either way, which is why cash can drop by more than the profit and loss suggests.

Money you take out for yourself. If you pay yourself through an owner’s draw, Intuit states those withdrawals are “recorded as reductions of equity, not expenses.” The draw leaves your bank account and lowers equity on the balance sheet, but it never appears on the profit and loss, so a profitable month can still leave less cash behind than you expected.

Customers who haven’t paid yet. This one depends on how your books are kept. The Small Business Administration explains that the accrual method “puts transactions on the books immediately upon completing the sale,” while the cash method only records it “once payment has been received.” On the accrual method, a job you finished and invoiced in October counts as October income even if the check arrives in November. Until it does, Intuit notes, QuickBooks puts unpaid invoices into accounts receivable, which shows on your balance sheet. The profit is real, but the cash is still out with your customer.

Once you know where to look, a good month with a thin bank balance can often be traced to one of these three. If you want to see the cash side on its own, QuickBooks can also run a Statement of Cash Flows, which Intuit describes as showing “the amount of cash that flows into your business, and the amount that flows out within a specific period.”

A few questions to ask each month

• On the profit and loss, is income in line with what you expected for the month, and did any expense line change in a way you can’t explain?
• On the balance sheet, does the cash figure match what you’d expect from your own bank accounts on the last day of the month?
• Is accounts receivable growing from month to month? If it is, more of what you’ve billed is still waiting on customers to pay.
• Are your loan and credit card balances moving in the direction you planned?

If an answer surprises you, ask your bookkeeper about it. There may be a simple reason, or it may point to a transaction that landed in the wrong place.

Both reports rest on the reconciliation

Both reports are built from the same transactions, so they can only be as accurate as the work underneath them. The Small Business Administration lists bank reconciliation among the jobs someone in a business needs to manage. Reconciling means matching what’s in your books against what your bank and credit card statements actually show, and it’s where a missing deposit or a charge recorded twice can be found. Putting each transaction in the right category is a separate part of the monthly work, and both parts feed the reports.

That’s how Coastal’s monthly bookkeeping works. Each month your transactions are entered and categorized, your bank and credit card accounts are reconciled, and then you get a month-end profit and loss and balance sheet you can actually use, with e-mail support whenever you have a question.

Coastal handles the bookkeeping. Your CPA handles the taxes.

Tell us a little about your business and Selena will e-mail you back to set up a time to talk. E-mail sms@coastalbookkeepingllc.com or request a quote.