Business owners everywhere appreciate the value of balance sheets and income statements. Companies that have strong income statements will typically have a good balance sheet, but it is possible for one to be weak and the other strong. Let’s look at the difference between these two financial documents.
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What Is a Balance Sheet?
On a balance sheet, you are going to see an overview of what a company owns and owes. A balance sheet is information on a specific period of time.
Balance sheets are typically used in with other financial documents, like income statements and cash flows, when performing a financial analysis. A balance sheet shows a company’s net worth at a specific time. Parties who want to gain insight into the company’s financial position can use it.
Information Included On a Balance Sheet
A balance sheet shows equity, liabilities, and assets at the end of an accounting period.
- Assets are property, inventory, and cash. They will appear on the sheet in order of liquidity. This means that assets that can be turned into cash quickly are on the top of the list.
- Liabilities are financial obligations or debts that a company has. These can include loans, taxes, accounts, payable, wages, and more.
- Equity describes the money that was originally invested when the company was founded plus any retained earnings subtracting distributions made to owners.
An easy way to define a balance sheet is Assets = Liabilities + Equity. This is an intuitive formula. A company has to pay for all the things it owns, a.k.a. its assets. This is done by getting a loan or taking on liability.
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Liabilities can also be paid by getting money from investors, also referred to as a shareholder’s equity, or getting the money from retained earnings.
What Is an Income Statement?
It’s common to hear the income statement referred to as a profit-and-loss statement. This document is designed to show the financial health of a company over a set amount of time. Companies turn to this document to get information about sales, revenue, and expenses. Based on this information, they can make important financial decisions.
Understandably, organizations are concerned about revenue and expenses because this helps make decisions designed to keep expenses under control while growing revenue. If expense grows faster than revenue, the company may lose profit. On an income statement, you will see operating expenses, cost of goods sold, and resulting net income.
Income Statement Versus Balance Sheet. What’s the Difference?
Understanding the difference between these two reports makes it easier to know what information each one provides.
- Performance is shown by the income statement, not the balance sheet.
- A balance sheet shows assets and liabilities for a specific time. An income statement shows total revenues and expenses for a period of time.
- Usage balance sheets help the company to see if they have sufficient assets to cover their obligations. Income statements test performance to determine financial issues that need to be corrected.
- Credit worthiness is determined by looking at the balance sheet. However, an income statement can show if a company is making enough to cover its liabilities.
Income statements and balance sheets test separate information. However, both documents provide information on the current and future financial health of an organization.