What is the correlation between the balance sheet and the profit and loss account?

Question

Accepted Answer

The balance sheet and profit and loss account are interrelated financial statements that provide a comprehensive view of a company's financial health.

The balance sheet shows a company's assets, liabilities, and equity at a specific point in time, while the profit and loss account shows a company's revenues, expenses, and net income over a period of time.
Changes in the balance sheet can impact the profit and loss account, and vice versa. For example, if a company takes out a loan (a liability on the balance sheet), it will have to pay interest (an expense on the profit and loss account), which will reduce its net income.
Similarly, if a company generates more revenue (a line item on the profit and loss account), it may use that revenue to purchase new assets (an increase in assets on the balance sheet), which can help it grow and increase profitability.
Analyzing both the balance sheet and profit and loss account together can provide a more complete picture of a company's financial performance and help identify areas for improvement.

Asked in Acuity Knowledge Partners

What is the correlation between the balance sheet and the profit and loss account?

Interview Questions Asked to Credit Analyst at Other Companies