Key takeaways
- A profit and loss account shows sales, running costs and the profit or loss made over a period, usually the financial year.
- A balance sheet shows what a business owns, owes and is owed on a single date, the last day of the financial year.
- A cash flow statement shows the cash that came in and went out, split into operating, investing and financing activities.
- A business can make a profit and still run short of cash, because profit counts sales not yet paid and excludes the full cost of assets bought.
- UK statutory accounts must include a balance sheet and a profit and loss account, plus notes, and usually a directors' report.
- Under FRS 102, a small entity is not required to prepare a statement of cash flows, so most small company accounts do not include one.
- A company is small for accounting periods starting on or after 6 April 2025 if it meets two of: turnover up to £15 million, balance sheet up to £7.5 million, 50 employees or fewer.
The profit and loss account (P&L) tells you whether the business made money over a period. The balance sheet tells you what it owns and owes on one date. The cash flow statement tells you where the cash actually came from and went. You need all three to judge a business, because profit and cash are not the same thing.
What is the difference at a glance?
Each statement answers a different question about the same business.
| Statement | Covers | Answers |
|---|---|---|
| Profit and loss account | A period, such as a year | Did we make a profit? |
| Balance sheet | One date, such as 31 March | What do we own and owe? |
| Cash flow statement | A period, such as a year | Where did the cash go? |
In UK company accounts the P&L is also called the income statement, and the balance sheet the statement of financial position. The names come from FRS 102, the UK accounting standard set by the FRC.
What does the profit and loss account show?
The P&L shows income minus expenses over a period, ending in a profit or loss. GOV.UK describes it as showing “the company’s sales, running costs and the profit or loss it has made over the financial year”.
A typical P&L runs in this order:
- Turnover (sales)
- Cost of sales, giving gross profit
- Overheads, such as rent, wages and depreciation
- Interest
- Tax, giving profit after tax
It records sales when you earn them, not when you are paid, and spreads the cost of equipment over its life as depreciation. Our guide to reading a profit and loss statement goes line by line, and the profit and loss template gives a worked layout.
What does the balance sheet show?
The balance sheet is a snapshot of the business on the last day of the period. GOV.UK says it shows “the value of everything the company owns, owes and is owed”.
It has three parts that always balance:
- Assets: equipment, vehicles, stock, money owed by customers, cash
- Liabilities: money owed to suppliers, HMRC, lenders
- Equity: share capital plus profits kept in the business
Assets minus liabilities equals equity. Read more in our guide to how to read a balance sheet.
What does the cash flow statement show?
The cash flow statement tracks real money in and out over the period, and explains why the bank balance changed. It groups cash into three types of activity:
- Operating: cash from trading, after paying suppliers, staff and tax
- Investing: buying or selling equipment, property or investments
- Financing: loans taken or repaid, shares issued, dividends paid
It usually starts with profit and adjusts for non-cash items such as depreciation.
Why can a profitable business run out of cash?
Profit and cash differ because of timing and capital spending. This example shows a small company with a £30,000 profit and a fall in cash.
| Item | P&L effect | Cash effect |
|---|---|---|
| Sales of £200,000, of which £25,000 unpaid at year end | +£200,000 | +£175,000 |
| Running costs of £166,000, all paid | −£166,000 | −£166,000 |
| Van bought for £20,000, depreciated £4,000 | −£4,000 | −£20,000 |
| Result | £30,000 profit | £11,000 less cash |
The P&L shows a healthy profit. The balance sheet shows a new van and £25,000 owed by customers. Only the cash flow statement shows the bank balance fell by £11,000. This is why cash flow forecasting matters even for profitable firms.
Which statements must a UK company prepare?
UK statutory accounts must include a balance sheet, a profit and loss account and notes, according to GOV.UK’s annual accounts guide. Most companies also need a directors’ report, and some need an auditor’s report.
A cash flow statement is not always required. ICAEW’s guide to small company simplifications, updated 20 August 2025, says “a small entity is not required to prepare a statement of cash flows”, citing FRS 102 paragraphs 1A.7 and 7.1B.
Which applies to you:
- If your company is a micro-entity (two of: turnover up to £1 million, balance sheet up to £500,000, 10 employees or fewer), you prepare a balance sheet and P&L, but file only the balance sheet at Companies House.
- If it is small (two of: turnover up to £15 million, balance sheet up to £7.5 million, 50 employees or fewer), you need no cash flow statement and do not currently have to file the P&L at Companies House.
- If it is medium or large, you normally prepare all three statements.
- If you are a sole trader, you do not prepare statutory accounts, but your Self Assessment figures come from a P&L.
These thresholds from Companies House apply to accounting periods beginning on or after 6 April 2025. Even when you file less, you must still send full accounts to your members.
Which statement should you look at first?
Use each statement for a different decision:
- Pricing and margins: the P&L. Our profit margin calculator helps.
- Borrowing or selling the business: the balance sheet, for debts and net assets.
- Paying bills, wages and HMRC: the cash flow statement or a cash forecast.
Frequently asked questions
What is the main difference between a P&L and a balance sheet?
The P&L shows profit or loss over a period, while the balance sheet shows what the business owns and owes on a single date. The P&L profit feeds into the equity section of the balance sheet.
Is a cash flow statement the same as a P&L?
No. The P&L counts income when earned and spreads asset costs as depreciation, while the cash flow statement records only actual cash received and paid.
Do small companies need a cash flow statement?
No. Under FRS 102 a small entity is not required to prepare a statement of cash flows, though it can choose to.
Which financial statement is most important?
None alone is enough. The P&L shows profitability, the balance sheet shows financial strength and the cash flow statement shows whether you can pay your bills.
What are the three main financial statements called under FRS 102?
The income statement (profit and loss account), the statement of financial position (balance sheet) and the statement of cash flows.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.