Balance sheets and income statements are two fundamental tools used in financial accounting. Using these tools, business owners can see the overall value of their business and its assets. However, a balance sheet differs from an income statement in several ways. To learn more about balance sheet vs income statement and the nuances distinguishing them from each other, continue reading.
Balance Sheet vs Income Statement
Also known as a statement of financial position, a balance sheet is a financial statement that shows the business’s assets, debt, liabilities and shareholder equity. It’s typically analyzed using a formula of liabilities + shareholder equity = assets. The balance sheet lists the business’s assets first, revealing the business’s cash on hand, investments, accounts receivable, inventory, prepaid expenses, property, intangible assets, etc.
The second part of a balance sheet consists of liabilities and ownership equity. Usually, the business’s assets are displayed on the left column of the balance sheet, whereas the business’s liabilities and ownership equity are displayed on the right column. Examples of liabilities on a balance sheet include accounts payable, deferred tax, unearned revenue, interest, promissory notes, etc.
An income statement, on the other hand, reveals the business’s revenue and expenses during a specified period. Also known as a profit and loss statement, it’s used to determine the overall financial health of a business. Income statements indicate how revenue is converted into net income after expenses have been accounted for.
With income statements, the cost of goods sold is matched with sales to calculate gross profit. This statement also reveals operating profit by deducting operating expenses from this number.
So, how do they differ? Among other things, an income statement reveals revenue and expenses during a particular period of time, whereas a balance sheet reveals revenue and expenses at a specific moment.
Furthermore, income statements are essential when seeking business funding, a loan, or some other form of monetary investment, as it reveals whether a business gained money or lost money during the reported period.
Both income statements and balance sheets are beneficial tools in small business accounting. In addition to balance sheets and income statements, there’s also a third financial statement: cash flow statements. Cash flow statements, as the name suggests, reveal the business’s cash transactions.