Are the Balance Sheet and Income Statements the same? This is a trivial question and many fail to acknowledge the fact that they differ a lot in many aspects. But you must not worry about failing to distinguish them. We know that you are looking for the same. We are here to help you with the Income Statement Vs Balance Sheet. This is our alpha subject for the day. Learn with us and enlighten yourself in a few minutes.
Balance Sheet & Income Statement: The Difference
The income statement and the balance sheet are both quite essential things to every business owner. When a firm has a good income statement, then it will generally have a good balance sheet. But the question is is it possible for any one of them to be weak whereas the other is strong.
How can this happen? What differentiates them? For the Income Statement Vs Balance Sheet battle, who ultimately wins?
We can find the difference in what exactly each one of the reports. The balance sheet provides you a detailed snapshot of the firm’s assets and liabilities at a given point in time.
On the other hand, the income statement provides your company an image of what your company’s performance has been in a given period. This is just a short glance at the differences between these fundamental reports. Let us bring more light on them.
Balance Sheet: Introduction
The balance sheet is a fundamental report of what the company and firm own and owes at a specific time. Other essential financial documents like the cash flow statement or income statements are used with the balance sheet to conduct a financial analysis of the company. The aim of a balance sheet is to display your firm’s net worth at a given point in time and to provide some interested parties a look into the company’s financial stability.
What Does a Balance Sheet Include?
The balance sheet, a financial statement composed of assets, equity & liabilities after the end of an accounting period.
- Assets: Cash, inventory, and property. These assets are put in order of liquidity. It means that the assets can easily be converted (liquified) into cash.
- Liabilities: A firm’s financial debts or obligations. They include taxes, wages, wages, accounts payable, etc.
- Equity: The amount of money invested in the listed company and the retained earnings subtracting any distributions made to the firm owners.
The foundation of the balance sheet is easy to understand via this accounting equation where assets equal equity plus liabilities.
Assets = Liabilities + Equity
The formula indicates: a firm has to pay for everything it owns (Assets) by either taking a loan (Liability), taking it from another investor (Issuing shareholders’ equity), or taking from the retained earnings.
For example, if a firm takes out a 4 year, $5,000 loan from the bank not only will its liabilities rise by $5,000, but so will the assets. If the firm takes $7,000 from the investors, its assets will grow by that amount, as will the shareholders’ equity.
$12,000 (Assets) = $5000 (Liabilities) + $7000 (Equity)
$12,000 (Assets) = $12000 ( Liabilities + Equity)
The company’s total assets must be equal to the total liabilities added equity for your balance sheet to be called “balanced.”
The balance sheet displays how a firm puts its assets to work and how those assets fall under the liabilities section. Since the investors and banks analyze a firm’s balance sheet and show how a company is making use of its resources. It is advisable to update your balance sheet every month.
Income Statement: Introduction
The income statement, also known as the profit and loss statement, shows a firm’s financial growth over a given time period. It also gives a company all the necessary info. about sales, revenue, and expenses. These profit and loss statements are essential in making important financial decisions.
Both revenue and expenses are quite important in keeping the company’s costs under control coupled with increasing revenue. These revenue and expenses are monitored closely. For example, a firm’s revenue could be rising, but if expenses are increasing faster than the revenue, then the company will start losing profit.
Generally, investors and lenders pay attention to the income statement to assist the company’s management. It will show if a company is generating a profit or loss for that given period. Moreover, it provides valuable data and even displays the efficiency of the firm’s management and its current performance when compared to other industry peers.
What Does an Income Statement Include?
Income statement, a financial report composed of revenue, costs of goods sold, and operating expenses. It also comes with the resulting net income or loss for a specific period.
An operating expense, an expense that a company regularly incurs like rent, payroll, and other non-capitalized equipment. A non-operating expense, not related to the main business operations like interest & depreciation charges. In the same way, operating revenue, revenue generated from the main business operations. A non-operating revenue, revenue not related to the main business activities.
Income Statement Vs Balance Sheet: The Major Differences
It is necessary to keep a note of all of the key differences between the balance and income statements. Therefore, you will get to know your company better.
- Timing: The income statement shows the total expenses and revenues for a given period of time while the balance sheet shows what a firm owns (assets) and owes (liabilities) at a specific period in time.
- Performance: The income statement shows the performance of the company but the balance sheet does not deal with this performance aspect.
- Reporting: The income statement gives revenue and expenses reports while the balance sheet gives assets, liabilities, and equity reports.
- Usage: The income statement analyzes performance and to have a look at any financial issues. The balance sheet evaluates whether the company has the right amount of assets to meet the financial obligations.
- Creditworthiness: Lenders make use of the income statement to decide if the company is generating enough profit to pay for its liabilities. while lenders use the balance sheet to check if they need to extend any more credit.
You Can Also Read, What’s Better For Your Business: Cash Basis Vs Accrual Basis Accounting!
Income Statement Vs Balance Sheet: Common Aspects
Though the balance sheet & income statement have many key differences there are a couple of things that they have in common. Coupled with the cash flow statements, they form three major financial statements. And even though they have different uses, they are both used by investors & creditors when making a decision to be involved with the company in the near future.
While we can summarize that the balance sheet & income statement evaluates different information. But we must agree on the fact that both statements play major roles to banks, creditors, and investors. Since they give a good indication of the present and future financial growth and stability of a company.
Wrapping-Up!
This post starts with the Income Statement Vs Balance Sheet battle but ends with a few common aspects between them. All in all, our research is dependable enough to make you get through with every detailed information you need. We hope you are happy with us and will be able to understand the financial health of any company.
