Profit and loss, balance sheet and cash flow: the three financial statements explained
What each of the three main financial statements shows, how they connect, and a small worked example with illustrative numbers, in plain language.
Every company reports its finances through three statements. Each answers a different question, and they only make sense together. This guide explains what each one contains and how they link. The numbers in the example are invented for illustration and do not describe any company.
At a glance
| Statement | The question it answers | Covers |
|---|---|---|
| Profit and loss (statement of profit and loss) | Did the business earn more than it spent? | A period of time, such as a quarter |
| Balance sheet | What does the business own and owe? | A single date, such as 31 March |
| Cash flow statement | Where did the cash come from and go? | A period of time |
Listed Indian companies prepare these under the Indian Accounting Standards (Ind AS), in a layout set by the Companies Act. Banks and some other entities follow their own formats.
1. The profit and loss statement
It starts with revenue (sales) and subtracts costs to reach profit.
- Revenue from operations: sales of the company’s goods or services.
- Other income: income not from the main business, such as interest received.
- Expenses: materials, employee costs, depreciation, interest paid (finance cost) and others.
- Profit before tax (PBT): revenue and other income, less expenses.
- Profit after tax (PAT): PBT less tax. This is the “bottom line”.
- Earnings per share (EPS): PAT divided by the number of shares.
EBITDA is a common shortcut, not a line in the statement: earnings before interest, tax, depreciation and amortisation. See EBITDA versus PAT.
2. The balance sheet
It is a snapshot with one rule: assets = liabilities + equity.
- Assets: what the company owns. Split into non-current (factories, equipment, long-term investments) and current (cash, stock, money owed by customers).
- Liabilities: what it owes. Non-current (long-term loans) and current (money owed to suppliers, short-term loans).
- Equity: what belongs to shareholders. It includes the share capital and the profits kept in the business, called reserves or retained earnings.
3. The cash flow statement
Profit is an accounting figure; cash is what actually moves. The statement has three parts:
- Operating activities: cash from the main business.
- Investing activities: buying or selling assets, such as equipment or investments.
- Financing activities: raising or repaying loans, issuing shares, paying dividends.
The company can report a profit and still have less cash, for example when customers have not yet paid. That is why the statement exists.
How the three connect
- The year’s PAT flows into equity on the balance sheet (less any dividend paid).
- The cash flow statement starts from profit, adjusts for non-cash items and changes in working capital, and ends at the change in cash, which is the change in the cash line on the balance sheet.
- Buying equipment appears in investing cash flow and as a higher asset on the balance sheet. Borrowing appears in financing cash flow and as a higher liability.
A small worked example (illustrative numbers)
A hypothetical company, in ₹ crore, for one year:
| Statement | Line | Amount |
|---|---|---|
| Profit and loss | Revenue | 1,000 |
| Total expenses (all costs, including interest and depreciation) | 880 | |
| Profit before tax | 120 | |
| Tax | 30 | |
| Profit after tax | 90 | |
| Cash flow | Cash from operations | 70 |
| Spent on equipment | (60) | |
| Loan raised, less dividend paid | 20 | |
| Net increase in cash | 30 |
Profit is 90 but cash from operations is only 70: some sales were on credit, so the cash had not yet arrived. Cash rose by 30 after equipment, borrowing and dividend. Each number explains a different part of the same year.
Where to find them
The quarterly results statement gives a condensed profit and loss and, at half-year and year end, the balance sheet and cash flow. The annual report has all three with detailed notes. See our complete guide to quarterly results and, for growth arithmetic, the growth calculator.
Common questions
Is profit the same as cash? No. Profit follows accounting rules about when income and cost are recorded; cash follows the timing of payments.
Which statement matters most? They answer different questions. Reading only one gives an incomplete picture.
Why do banks look different? Their main “revenue” is interest, and their balance sheet is mostly loans and deposits. See how banks report results.