Balance Statement vs. Income Sheet: Differences & Purpose (2024)

Companies release financial statements for each accounting period. These most often consist of the:

• Balance sheet: provides a snapshot of a company’s assets and liabilities at a given point in time which is usually at the end of an accounting period.
• Income statement: provides a picture of a company's profitability performancem inclusive of revenues and expenses, over a specific time period.
• Cash flow statement: displays how a company manages its cash over a specific period of time.

These key statements are required by the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), tax authorities, regulators, potential investors, and competitors.

What is an Income Statement?

Also known as a profit and loss (P&L) statement, an income statement summarizes a company's financial performance over a specific period of time. It displays revenues, the cost of goods sold, and the net profit attributable to shareholders.

Investors and lenders compare the income statements from different periods to evaluate a company's performance. Various ratios can be created from the data included in an income statement. These include:

• The profit margin ratio: which displays a company's profitability in relation to its sales and expenses
• Return-on-equity ((ROE)) ratios: display the efficiency of a company's capital allocation
• The times-interest-earned ratio: assesses a company's margin of safety in relation to its interest payments.

Income Statement Example

As an example, we're going to take a look at Microsoft Corporation's FY22 Q1 income statement:

What’s Included on a Financial Income Statement?

An income statement includes:

• Revenue: the total income generated during a specific period, divided into operating revenue or revenue generated from the core activities of a business, and non-operating revenue.
• Realized gains and losses: also known as other income, are one-time, non-recurring gains arising from the sale of assets such as real estate, minority holdings in other companies, and subsidiary companies
• Expenses: costs incurred during normal business and includes the cost of goods sold (COGS), which is the cost of materials and labor used in the production of goods and services.
• Net income/loss: also known as the bottom line, it is determined by subtracting total expenses from total revenue.

What is a Balance Sheet?

A balance sheet is a "snapshot" of what a company owns and what it owes on a particular date. For example, a company's financial statements for the month of September will contain a balance sheet as of September 30th and an income statement for the entire month of September.

A balance sheet is comprised of three elements:

• Assets
• Liabilities
• Shareholders' equity

Investors use a company's balance sheet to determine how effective company management is in using its assets and debt to generate revenue. That revenue then appears on the company's income statement.

Assets are what a company owns and include property, cash, equipment, and things such as trademarks. Liabilities are what a company owes and include long-term and short-term debt. Shareholders' equity includes everything left over. A company's value, or worth, is determined by subtracting its liabilities from its assets.

Balance Sheet Example

We're going to look at Microsoft Corporation's FY22 Q1 balance sheet.

What's on a Balance Sheet?

A balance sheet is divided into sections that display:

1. Current assets: typically listed in the order of their liquidity, assets that can most easily be converted into cash including cash, inventory, and property.
2. Total assets: should equal the sum of total liabilities and shareholders' equity.
3. Current liabilities: these are a company's financial obligations due in the next 12 months, which can include accounts payable, rent due, and short-term borrowings.
4. Long-term liabilities: a company’s liabilities that are not current, which can include long-term debt and operating leases.
5. Shareholders' equity: the amount of money that was originally invested in the company plus any retained earnings minus net losses and distributions made to shareholders. It equals the difference between assets and liabilities.

In order for a company's balance sheet to be "balanced", its total assets must equal its total liabilities plus equity:

Assets = Shareholders' Equity + Liabilities

1. Balance Sheet Current Assets Section

• Cash and cash equivalents: the value of the cash held by a company and the value of cash equivalents which include marketable securities and short-term deposits.
• Short-term investments (marketable securities): at $111,450 million
• Accounts receivable: money that is owed to a company for goods and services that have been delivered, but not yet paid for.
• Inventories: finished products ready for sale and any raw materials intended for the production of goods or services.
• Total current assets: the sum of the above, and any additional items considered current assets.

2. Balance Sheet Long-Term Assets Section

• Property and equipment: also known as PPE for Property, Plant and Equipment, these are long-term investments of greater than a year and that can't be turned into cash quickly.
• Equity investments
• Intangible assets: which can include trademarks and intellectual property.

3. Balance Sheet Current Liabilities Section

Current liabilities are short-term liabilities that are due within one year and include:

• Accounts payable: a company's outstanding debt owed to suppliers or vendors for goods and services delivered.
• Accrued compensation: any wages yet to be paid.
• Total current liabilities: the sum of the above items.

4. Balance Sheet Long-Term Liabilities Section

• Long-term debt: owed to banks, lenders or suppliers.
• Operating lease liabilities: includes rent, taxes, and utilities
• Total liabilities: the sum of the above items.

5. Balance Sheet Shareholders' Equity Section

• Shareholders' equity: is a company's net value or net worth, and is the money shareholders would receive if all the company's liabilities were paid off, at $151.978 million
• Retained earnings: that portion of the net income that hasn't been distributed to shareholders as dividends, it is intended to be re-invested or used to pay off debt, at $66,944 million.

Analyzing a Balance Sheet vs. Income Statement

A balance sheet provides data to create the current ratio, debt-to-equity ratio, and return on shareholders' equity ratio. An income statement contains data that can be included in the calculation of ratios including the:

• Gross margin
• Operating margin
• Price-to-earnings
• Interest coverage ratios

Investors and shareholders use income statements to assess a company's current performance and future prospects. Lenders typically pay more attention to a company's balance sheet than its income statement because they are interested in what assets can be used as collateral. Both statements are useful in assessing a company's overall financial health.

Cash Flow Statement

A third key financial statement is the cash flow statement. The cash flow statement displays the cash a company made through its operations, investments, and financing. The sum of these three is the company's net cash flow.

A cash flow statement also displays cash outflows for business activities and investments.

Bottom Line

Both balance sheets and income statements are valuable for investors in the pursuit of analyzing the performance of companies. Each of these, as well as the cash flow statement, can be used to better understand a company's business finances.