---
title: "Balance sheet and profit and loss account"
subject: "Construction Management"
chapter: 6
key: "semester_8/construction_management:balance-sheet-profit-loss"
source: https://www.bctengineer.com/q/semester_8/construction_management/balance-sheet-profit-loss
site: BCT Engineering
---

# Balance sheet and profit and loss account

Construction Management · Chapter 6: Construction Process

- Asked in: 2067 Mangsir (old course), 8 marks; 2066 Magh (old course); 2069 Bhadra (old course), 4 marks; 2065 Baisakh (old course); 2064 Poush (old course) (asked 5 times)
- Video: [Profit and Loss Statement for Contractors! Know Your Accounting for MAXIMUM Profit!](https://www.youtube.com/watch?v=veVxk1VIKeg) — Tyler Link
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_8/construction_management/balance-sheet-profit-loss
- Whole chapter: https://www.bctengineer.com/md/semester_8/construction_management/chapter-6

## Question

Describe balance sheet and profit and loss account and their functions.

## Short answer

A balance sheet shows assets, liabilities, and equity on a given date, balancing as Assets = Liabilities + Equity. A profit and loss account summarizes revenue and expenses over a period to show net profit or loss. The balance sheet shows position at a date; P&L shows performance over a period.

## Answer

#### Balance sheet
A balance sheet is a statement of the financial position of a firm on a given date. It shows **assets** (what the firm owns), **liabilities** (what it owes) and the **owner's equity**, and always balances: Assets = Liabilities + Equity.

| Liabilities & Equity | Rs | Assets | Rs |
|---|---|---|---|
| Share capital | 1,000,000 | Fixed assets (plant, building) | 1,200,000 |
| Reserves | 200,000 | Stock of materials | 300,000 |
| Long-term loan | 500,000 | Debtors (receivable from clients) | 350,000 |
| Creditors (suppliers) | 300,000 | Cash and bank | 150,000 |
| **Total** | **2,000,000** | **Total** | **2,000,000** |

**Functions:** shows the financial strength and liquidity (current assets/current liabilities); helps in judging solvency and borrowing capacity (used in pre-qualification); shows how funds were raised and used; and is a basis for tax and investor decisions.

#### Profit and loss account
It summarises the revenue and expenses of a firm for a period (usually one year) and shows the net profit or loss.

| Item | Rs |
|---|---|
| Revenue (contract receipts) | 5,000,000 |
| Less: direct costs (material 2,000,000, labour 1,200,000, subcontract 500,000) | 3,700,000 |
| **Gross profit** | **1,300,000** |
| Less: overheads 500,000, depreciation 150,000, interest 100,000 | 750,000 |
| **Profit before tax** | **550,000** |
| Tax at 25% | 137,500 |
| **Net profit** | **412,500** |

**Functions:** shows how profitable the business is; helps to control costs by comparing items with budget and previous years; provides the basis for tax and dividends; and helps to decide on pricing and bidding rates.

The balance sheet shows the position at a date, whereas the profit and loss account shows the performance over a period; the two are linked since the net profit is added to the reserves.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. Balance sheet equation:
   A. Assets = Revenue - Expenses
   B. Equity = Assets + Liabilities
   C. Profit = Assets
   D. Assets = Liabilities + Equity
   Answer: D. It shows position at a date. (Key point: Equation)

2. Difference between balance sheet and P&L:
   A. Balance sheet is position at a date; P&L is performance over a period
   B. Both at a date
   C. Both over a period
   D. P&L shows assets
   Answer: A. Net profit is added to reserves. (Key point: Time)

3. In the example net profit is:
   A. Rs 550,000
   B. Rs 412,500 after 25% tax on 550,000
   C. Rs 1,300,000
   D. Rs 137,500
   Answer: B. 550,000 minus 137,500 = 412,500. (Key point: Net profit)

4. Balance sheet is used in:
   A. Calculating gross profit
   B. Opening bids
   C. Judging solvency and borrowing capacity, e.g. in pre-qualification
   D. Site layout
   Answer: C. Also liquidity. (Key point: Use of balance sheet)

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