Balance Sheet v Income Statement: Differences Explained (Finally) — Collective Hub (2024)

As a Business-of-One, you have many, many hats to wear. Some of your duties are made up of the things you love to do…the reason you’re in business in the first place. And some, well… not so much. Like trying to figure out the nuances of the “balance sheet vs income statement” question.

Short answer: They’re similar in many respects and work together, but they perform different functions. For more insight on this, read on!

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What is the difference between a balance sheet and an income statement?

What goes on an income statement vs balance sheet?

What comes first: income statement or balance sheet?

Should the income statement and balance sheet match?

What are examples of financial statements?

What is the difference between a balance sheet and an income statement?

The balance sheet shows your company’s assets, liabilities, and equity – basically the financial health of the business at a specific point in time. It helps you figure out if you have enough money to cover your expenses and other financial obligations.

The income statement shows a cumulative view of your total revenues and expenses over a longer period – how the company’s performing. This information is key, especially if you’re just starting out in business. It prepares you for when you may need to pivot quickly for better results.

What goes on an income statement vs balance sheet?

Throughout time, business owners across the centuries have pondered the age-old question: what goes on an income statement vs a balance sheet. Seriously, though. Unless you’re an accounting whiz kid, it’s very easy to get these two important docs confused since they both report aspects of your company’s finances.

The income statement and the balance sheet work together to illustrate how well your business is doing, how much it’s worth, and areas that could be improved. The income statement shows you what your company has taken in, what it’s paid out, and your total profit or loss for a specific period in the year.

The income statement shows:

  • Sales: revenue or what your business has generated from goods and services sold
  • Costs: the amount you spent on labor and materials to make the goods and services
  • Gross profit: your sales minus your costs
  • General costs: building rent, software, office supplies, wages, utilities, and more
  • Earnings before tax: the money your company brought in before taxes
  • Net operating income: your sales minus costs minus operating expenses
  • Other income or expenses: income and expenses that aren’t related to the day to day operations, like interest income or depreciation expenses
  • Net income: your net income minus other income and expenses total earnings minus total expenses, including taxes

The balance sheet can be divided into two columns. One side shows the company’s short- and long-term assets and the other side shows its liabilities and equities for a specific point in time. With the two sides (and here’s the catch) needing to match or, you’ve probably guessed it, balance.

The balance sheet is typically prepared monthly, quarterly, or annually. You could prepare one whenever you need to show your company’s financial position.

The balance sheet shows your assets:

  • Account balances: sum of money in checking and savings
  • Accounts receivable: what other people owe you
  • Inventory on hand
  • Fixed assets: items your business owns, like equipment and machinery
  • Intangible assets: trademarks, patents and domain names

It also shows your liabilities:

  • Accounts payable: what you owe other people
  • Current liabilities: short terms loans that you can pay off within one year, like credit card balances
  • Long term liabilities: debt that will take you more than 12 months to pay off, like a business loan

And finally, it shows your equity:

  • Shareholders equity: net assets, capital invested, revenue

Which is more important: income statement or balance sheet?

Short answer? It depends. And, truthfully, how can you choose a favorite? You love ALL your hardworking financial documents equally. Your income statement and balance sheet, along with a third doc, the cash flow statement (more on this later), paint the company’s entire financial picture. Each document has its own talents and quirky personality.

However, many small business owners say the income statement is the most important as it shows the company’s ability to be profitable – or how the business is performing overall. You use your balance sheet to find out your company’s net worth, which can help you make key strategic decisions. But, the balance sheet doesn’t show the whole story on its own.

What comes first: income statement or balance sheet?

This is not like the existential “chicken or egg” question. The income statement or Profit and Loss (P&L) comes first. This is the document where the income or revenue the business took in over a specific time frame is shown alongside expenses that were paid out and subtracted. If your revenue was greater than your expenditures, your business made a profit.

If your expenses were higher than your revenue, your business ran at a loss for that period. This can be a bit of a bummer, but good intel to have so you can adjust accordingly.

The balance sheet contains everything that wasn’t detailed on the income statement and shows you the financial status of your business. But the income statement needs to be tallied first because the numbers on that doc show the company’s profit and loss, which are needed to show your equity.

Should the income statement and balance sheet match?

You will not get your income statement and balance sheet to match – even if you are talented in the accounting arena. That’s because they’re not supposed to match because these two reports feature different line items. However…they do play off one another in that any revenue increases on the income statement will show up as an increase of equity on the balance sheet.

So how do you know if your balance sheet is correct and does indeed balance? Your liabilities and equity, when added together, should equal your total assets. If these two figures match, your balance sheet is correct. (Oh, happy day!)

If they don’t balance, your biz may have some accounting issues. This is when you do yourself a HUGE favor and get help from an accounting pro. You know, someone who lives and breathes this stuff – like a bookkeeper.

Wait, what? You don’t have a bookkeeper? Ok, you should seriously consider getting a bookkeeper. The modest outlay could save you boatloads of cash at tax time, not to mention save you from pulling out all your hair trying to balance your books.

What are examples of financial statements?

Your company’s financial statements are made up of three important documents: the balance sheet, the income or Profit and Loss statement, and the cash flow statement. It’s easy to get confused on the different functions of your balance sheet vs income statement vs cash flow statement.

The balance sheet summarizes the company’s balances and tracks what it owns, what it owes, and how much equity is available – either for the owner and/or for shareholders. The income statement details your total revenues and expenses over a longer period to show you how the company is performing overall.

The cash flow statement shows (ahem) the flow of cash in and out of the business by recording the changes in both the balance sheet accounts and the income statement. Together with the balance sheet and income statement, the cash flow statement gives you your “cash position.”

There you have it. Hopefully, you’re now clearer on your income statement v balance sheet. And being the savvy sole proprietor you are, you probably noticed that the same question was asked and answered in several different ways.

To quote legendary salesman and motivational speaker, Zig Ziglar: “Repetition is the mother of learning, the father of action, which makes it the architect of accomplishment.” So go ahead and read over the magnificent seven one more time…

It’s a lot to take in, especially if financial statements are not your thing. But you’ve got this! After all, you took the biggest leap and became a solo entrepreneur! Now that takes guts and smarts.

Balance Sheet v Income Statement: Differences Explained (Finally) — Collective Hub (1)

Janie Basile

Janie Basile is a freelance content creator from Scotland with 20 years’ experience crafting content for insurance and technology startups and financial services companies. After taking the leap, a few years ago, into the world of freelancing, she is fully immersed in learning all there is to know about financially managing a Business-of-One. She enjoys passing that intel on to other solo entrepreneurs in the form of interesting and informative articles. Her work has appeared in places like TechCrunch, Redfin, TheZebra, and Freedom Financial.

Balance Sheet v Income Statement: Differences Explained (Finally) — Collective Hub (2024)

FAQs

Balance Sheet v Income Statement: Differences Explained (Finally) — Collective Hub? ›

The balance sheet contains everything that wasn't detailed on the income statement and shows you the financial status of your business. But the income statement needs to be tallied first because the numbers on that doc show the company's profit and loss, which are needed to show your equity.

What is the difference between the balance sheet and income statement? ›

Owning vs Performing: A balance sheet reports what a company owns at a specific date. An income statement reports how a company performed during a specific period. What's Reported: A balance sheet reports assets, liabilities and equity. An income statement reports revenue and expenses.

Which is more important the balance sheet or the income statement? ›

Investors take particular interest in balance sheets because they reveal whether your company can build the long-term assets needed to keep up with the liabilities that inevitably arise as you do business. Income statements. The best way to analyze a business for investment purposes is to dissect its income statement.

What are the primary differences between the income statement and the balance sheet and changes in equity? ›

The balance sheet provides an overview of assets, liabilities, and shareholders' equity as a snapshot in time. The income statement primarily focuses on a company's revenues and expenses during a particular period.

What is one of the key differences between the income statement and the balance sheet quizlet? ›

A balance sheet describes a firm's financial status at a specific time (end of fiscal year or quarter). An income statement represents a firm's operating results over a period of time (a fiscal year or quarter).

What is the difference between the three financial statements? ›

The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.

What is the link between the balance sheet and the income statement? ›

The balance sheet shows the cumulative effect of the income statement over time. It is just like your bank balance. Your bank balance is the sum of all the deposits and withdrawals you have made. When the company earns money and keeps it, it gets added to the balance sheet.

What is the most important thing on a balance sheet? ›

Many experts believe that the most important areas on a balance sheet are cash, accounts receivable, short-term investments, property, plant, equipment, and other major liabilities.

What is the difference between a balance sheet and a P&L? ›

Here's the main one: The balance sheet reports the assets, liabilities, and shareholder equity at a specific point in time, while a P&L statement summarizes a company's revenues, costs, and expenses during a specific period.

Which statement is the most important in accounting? ›

Types of Financial Statements: Income Statement. Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.

What are the three core financial statements? ›

The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.

What are the main differences between the statement of financial position and the income statement? ›

Key Takeaways

Also referred to as the statement of financial position, a company's balance sheet provides information on what the company is worth from a book value perspective. A company's income statement provides details on the revenue a company earns and the expenses involved in its operating activities.

What is the relationship between the balance sheet and the income statement quizlet? ›

The main link between the two statements is that profits generated in the income statement get added to shareholder's equity on the balance sheet as retained earnings. Also, debt on the balance sheet is used to calculate interest expense in the income statement.

Which financial statement shows net worth? ›

The balance sheet or net worth statement shows the solvency of the business at a specific point in time. Statements are often prepared at the beginning and end of the accounting period (i.e. January 1).

What does not affect cash flow? ›

In accounting, noncash items are financial items such as depreciation and amortization that are included in the business' net income, but which do not affect the cash flow.

What are the three categories of a balance sheet? ›

The three main components or sections of a balance sheet are assets, liabilities, and shareholders' equity. A multi step balance sheet classifies business assets and liabilities as current or long-term (over twelve months).

What does an income statement show? ›

An income statement is a financial statement that shows you the company's income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business.

What is the purpose of a balance sheet? ›

The purpose of a balance sheet is to reveal the financial status of an organization, meaning what it owns and owes. Here are its other purposes: Determine the company's ability to pay obligations. The information in a balance sheet provides an understanding of the short-term financial status of an organization.

What does the balance sheet show? ›

Introduction. The balance sheet provides information on a company's resources (assets) and its sources of capital (equity and liabilities/debt). This information helps an analyst assess a company's ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners.

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