Bookkeeping is a vital part of running any business, but it is also where many small business owners hit a wall. In this series, we break down key bookkeeping principles so you can spend less time struggling with software and more time growing your business.

A fundamental concept to master is the difference between your Profit & Loss (P&L) report and your Balance Sheet. Understanding how each works ensures your transactions are posted correctly from day one.

 

What is a Profit & Loss (P&L) Statement?

The P&L (also known as the Income Statement) tracks your business income and operational expenses over a specific period, typically a month, quarter, or full financial year. It answers one simple question: “Is the business making a profit?”

Think of it as a moving picture of your trading performance over time:

• Tracks total turnover: Invoices raised and sales completed.
• Deducts day-to-day running costs: Rent, materials, software, staff wages, and utilities.
• Shows the net result: Your profit or loss before and after tax for that period.

 

What is a Balance Sheet?

While the P&L tracks activity over time, the Balance Sheet provides a still snapshot of your business’s overall financial health at one exact moment (e.g., as of 31st March). It shows what the business owns, what it owes, and what is left over for the owners.

It breaks down into three key areas:

• Assets: What the business owns or is owed (e.g., cash, equipment, unpaid customer invoices).
• Liabilities: What the business owes to others (e.g., supplier bills, credit cards, bank loans, VAT owed to HMRC).
• Equity: The net value left in the business after liabilities are deducted (Assets − Liabilities = Equity).
• Quick Example: If your business owns a van worth £10,000 (Asset) and you have £4,000 left on the vehicle loan (Liability), your business equity in that vehicle is £6,000.

 

The Most Common Bookkeeping Pitfalls We See

When business owners handle their own bookkeeping, transactions frequently get posted to the P&L when they belong on the Balance Sheet. Coding these incorrectly distorts your profit figures and can lead to unwelcome surprises at Year-End!

Here are three common items that often get posted to the wrong place:

• Dividends: Dividends are not an operational business expense. They are a distribution of after-tax profits to shareholders. They belong on the Balance Sheet (reducing equity/retained earnings), never on the P&L. Posting dividends to the P&L artificially reduces your profit and gives a false picture of trading performance.
• Corporation Tax Payments: Paying your tax bill to HMRC is settling a statutory liability—it does not reduce your trading profit for the current year. The payment belongs on the Balance Sheet against your HMRC liability account.
• Director’s Loan Repayments: Transferring money between the company bank account and your personal account isn’t a business expense. It is a movement between Balance Sheet accounts (Cash and the Director’s Loan Account).

 

P&L vs Balance Sheet at a Glance

Feature	Profit & Loss (P&L)	Balance Sheet (BS)
Purpose	Shows business profitability	Shows financial position
Timeframe	Covers a period (e.g., month, year)	Snapshot at a specific point in time
Includes	Income, expenses, profit/loss	Assets, liabilities, loan accounts, equity
Helps with	Understanding performance	Assessing financial health
Key Question	“Are we making money and running a profitable business?”	“Can we meet our obligations and what is our business actually worth?”

 

How Moore Accountancy Can Help

Both reports work together. A clean P&L shows your business is trading profitably, while an accurate Balance Sheet ensures those profits are properly accounted for, liabilities are tracked, and dividends are drawn legally.

As ICAEW Chartered Accountants, our team at Moore Accountancy routinely helps small business owners and sole traders get their software reconciled, correct misposted items, and ensure their numbers are fully compliant.

Unsure if your transactions are sitting in the right place, or need help reviewing your Balance Sheet?

Get in touch with the team at Moore Accountancy today.