Accounting & reportsGuide
How to read a profit and loss, balance sheet and cash flow
Nefin Team5 min read
Every set of accounts comes down to three reports. The profit and loss answers "did we make money?". The balance sheet answers "what do we own and what do we owe?". The cash flow statement answers "where did the cash go?". You don't need to be an accountant to read them; you need to know which question each one answers and where to look first.
- The Profit & Loss report is set to 1 to 31 October 2026 on the accrual basis and generated.
- Revenue of 8,370.00 and expenses of 5,952.50 fill in account by account, for a net income of 2,417.50.
- The 4000 Revenue line, 8,250.00, is picked out.
- The General Ledger is generated for account 4000 over the same dates.
- It lists four postings in date order whose credits total 8,250.00, the same as the Profit & Loss line.
The profit and loss: did we make money?
The profit and loss (P&L, or income statement) covers a period: a month, a quarter, a year. It lists what you earned in that period, then what it cost you, and the difference is your net income. Here is a small business's October:
| Account | October |
|---|---|
| 4000 Revenue | 8,250.00 |
| 4100 Other income | 120.00 |
| Total revenue | 8,370.00 |
| 5000 Cost of goods sold | 2,140.00 |
| 6100 Rent expense | 1,200.00 |
| 6300 Salaries expense | 2,600.00 |
| 6400 Bank charges | 12.50 |
| Total expenses | 5,952.50 |
| Net income | 2,417.50 |
- Read the bottom line first. 2,417.50 is positive, so October made a profit. A negative figure is a loss.
- Then the top line. Revenue is your sales before any costs. Compare it with last month by running the report again for September.
- Then the biggest expenses. Here salaries and cost of goods sold are about four fifths of the costs; that's where a change would matter most.
- Watch for surprises: an account you don't expect, or one that's far bigger than usual, is usually something posted to the wrong place.
Profit is not cash. An invoice you sent on 28 October counts as October revenue even if the client pays in November. That's the accrual basis, and it's what most businesses report on. Nefin can also show the cash basis, where invoices and bills count when they're paid; switch between the two on the report.
The balance sheet: what do we own and owe?
The balance sheet is a snapshot on one date, not a period. It has three parts:
- Assets: what the business owns or is owed. Cash in the bank, receivables (invoices clients haven't paid yet), stock, equipment.
- Liabilities: what the business owes. Payables (bills you haven't paid yet), VAT collected and not yet paid over, salaries owed, loans.
- Equity: what's left for the owners. The money they put in, plus the profits kept in the business.
Assets always equal liabilities plus equity, once the year's profit is counted in equity. When you read it, start with cash: does it match your bank statements on that date? Then compare receivables with payables. If clients owe you much less than you owe suppliers and the VAT office, the next few weeks will be tight even in a profitable month.
The cash flow statement: where did the cash go?
The cash flow statement explains why your cash went up or down over the period, which the P&L can't. Nefin's starts from net income and works towards cash in three sections:
| Section | What it shows |
|---|---|
| Operating | Net income, adjusted for money tied up or freed in day-to-day running: receivables up means cash not yet collected, payables up means cash not yet paid out |
| Investing | Cash spent on long-term assets, like equipment |
| Financing | Cash from loans and owners, or paid back to them |
The three totals add up to the net change in cash, and the report ends with your beginning and ending cash. A business can show a profit and still run out of cash, usually because receivables grew faster than sales were collected. The operating section is where that shows up first.
Running them in Nefin
All three are under Reports, in Financial statements. Pick the dates (or a single date for the balance sheet) and the basis, accrual or cash, which starts on your company's default from Settings. The P&L can also be filtered to one client or vendor, to see what a single relationship brought in or cost.
Reports are generated in the background, so you can keep working; Nefin tells you when one is ready and keeps it in Generated Reports for 30 days, or for good if you mark it as a favourite. Each one downloads as Excel, CSV, HTML, TXT or PDF. Accounts with a zero amount are left out, so the statement only shows what's in use.
When a number looks wrong
Every line on these reports is the total of one account. To see what's inside it, run the General Ledger for that account and the same dates: it lists every posting in date order with its journal number and a running balance, and the downloaded file adds the document each one came from, such as INV-1042. That's what the animation above does for October's revenue: four postings, 8,250.00 in total, the same as the P&L line.
If the totals themselves look off, run the Trial Balance. It lists every account's debits and credits and confirms the two sides are equal.
A five-minute monthly read
- Net income: profit or loss, and how it compares with last month.
- Revenue: in line with the invoices you sent?
- The two or three biggest expenses: any surprises?
- Cash on the balance sheet: does it match the bank?
- Operating cash flow: is profit turning into cash, or piling up in receivables?
