The profit and loss account or income statement summarizes the revenues
and expenses of a business enterprise for an accounting period. The information
on the income statement is regarded by many to be more important than
information on the balance sheet because the income statement reports the
results of operations and enables to analyze the reasons for the enterprises’
profitability or loss thereof. A close relationship
exists between income statement
and balance sheet; the statement of retained earnings which is a concomitant of
income statement explains the change in retained earnings between the balance
sheets prepared at the beginning and the end of the period.
Balance sheet is one of the most important financial statements which
shows the financial position of a business enterprise as on a particular date.
It lists as on a particular date, usually at the close of the accounting
period, the assets, liabilities and capital of the enterprise. An analysis of
balance sheet together with profit and loss account will give vital information
about the financial position and operations of the enterprise. The analysis
becomes all the more useful and effective when a series of balance sheets and profit
and loss accounts are studied.