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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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.
A balance sheet shows equity, liabilities, and assets at the end of an accounting period.
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.
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.
Understanding the difference between these two reports makes it easier to know what information each one provides.
Income statements and balance sheets test separate information. However, both documents provide information on the current and future financial health of an organization.
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