As a business owner, you’ll probably hear the terms balance sheet and income statement thrown around frequently by accountants, bankers, lawyers, or other professionals helping you with your finances. It’s not just about numbers; it’s about knowing what those numbers mean to you so that you can make better business decisions and achieve your financial goals faster than ever. What’s the difference between these two financial statements? Find out here! (Hint: It has to do with your profit.)
The Balance Sheet vs. Income Statement is a key financial comparison for any business. The balance sheet shows a company’s assets, liabilities, and equity at a specific time. The income statement reflects the company’s revenue and expenses over some time.
The two statements are related, as the income statement will show how the company’s revenue was generated and used. The balance sheet can help identify red flags, such as high liabilities or low equity. The income statement can help track progress over time or reveal areas where the company may need to make changes.
Read More: Revenue vs. Profit: What’s the Difference?
What is a Balance Sheet?
The balance sheet shows how much money you have coming in versus going out. In simple terms, it shows what you owe versus what you own. A company’s balance sheet is similar to its checkbook. The bank account would show a positive balance if you write checks to pay bills. However, if you spent more than you earned, then the bank account balance would show a negative number.
Balance Sheet Examples
- The balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder’s equity at a specific time.
- The balance sheet can be prepared using either the cost or fair value basis.
- It is typically presented as a two-sided document with current assets on one side and current liabilities and shareholder’s equity on the other side.
- Current indicates those items are expected to have an original or eventual cash outlay within one year from the date of issuance of the balance sheet.
- Long-term indicates those items which are not expected to have an original or eventual cash outlay within one year from the date of issuance of the balance sheet.
What is an Income Statement?
An income statement is a financial report that details how much revenue a business generates and how much profit it makes. An income statement is different from a balance sheet because it focuses on the past period. It shows how much money was brought in versus how much was paid out over a specific period.
Income Statement Examples
The income statement is one of the three most important financial statements for a businessman’s revenues, expenses, and profits over time. The income statement can be used to measure a company’s financial performance, compare it to other businesses in its industry, and make decisions about where to invest money. An income statement has five sections: profit or loss from operations; other operating income or expenses; interest expense; taxes on operations; net earnings.
- The balance sheet and income statement are two of a business’s most important financial statements. They provide insights into a company’s financial health and performance. The balance sheet shows a company’s assets, liabilities, and equity, while the income statement shows a company’s revenue, expenses, and net income.
- Although they give insights into a company’s finances, they are used for different purposes. The balance sheet is used to assess a company’s solvency, while the income statement is used to assess a company’s profitability.
Companies use the balance sheet to show how much money they have in cash or liquid assets. It also provides information about company investments to generate revenue or provide products or services.
- A company’s net worth can be calculated by subtracting its total liabilities from its total assets on the balance sheet. For example, if a company has $10 million in assets and $5 million in liabilities, then it would have $5 million in net worth. Similarly, the income statement calculates profitability by showing revenues minus expenses.
Differences Between Balance Sheet and Income Statement
- The balance sheet is a snapshot of a company’s financials at a given time, while the income statement is a record of a company’s financials over time.
- The balance sheet shows what a company owns (assets) and owes (liabilities). In contrast, the income statement shows how much revenue a company has generated and what expenses it has incurred over time.
- The balance sheet is used to assess a company’s financial health, while the income statement is used to assess a company’s profitability. Another key difference is that assets are recorded on the balance sheet at their original value. In contrast, assets on an income statement are recorded at their current value.
- The differences between these two essential accounting documents can be seen when comparing historical data with projections for future growth. For example, if you compare this year’s net worth with last year’s net worth on a balance sheet, your answer will only reflect items included on both years’ sheets.
- But, if you compare this year’s net worth with last year’s net worth as stated on an income statement, your answer will show changes in value from one year to the next due to both items added and subtracted from the equation.
- Similarly, using just a balance sheet would make it seem like a company is doing better than expected because its cash flow is positive despite declining profits; but using just an income statement would reveal that revenues have dropped, so there was no profit being made.
The balance sheet and income statement are two essential financial reports for any business. The balance sheet provides a snapshot of a company’s assets, liabilities, and equity at a given time. At the same time, the income statement shows how much revenue a company generates and what expenses it incurs over some time. Although both reports are essential, they provide different information that can be used to make informed decisions about a business.