The Difference Between a Balance Sheet and an Income Statement | Society (2024)

The Difference Between a Balance Sheet and an Income Statement | Society (1)

Maintaining detailed financial records is just one of many aspects to running a successful business. Good bookkeeping practices can give a business invaluable information on its performance and help guide it to future success. However, not every business owner automatically has a strong understanding of accounting practices and the different types of financial statements a business should maintain. And that’s okay! There are many types of financial statements, but two important types that all business owners should familiarize themselves with are the balance sheet and the income statement.

What is a Balance Sheet?

A balance sheet is a report that shows a company’s financial health at a specific point in time. It reports on three distinct factors: assets, liabilities and equity.

  • Assets are what your company owns. This includes cash, inventory, investments, debts owed to the company, and any intellectual property or copyrights. Assets can be separated by “current assets” (assets that can be turned into cash within a year such as cash and inventory) and “noncurrent assets” (assets that can’t be turned into cash within a year such as property and long-term investments).
  • Liabilities are what your company owes. This includes debt, taxes, loans, accounts payable and wages. Like assets, liabilities can be separated by “current liabilities” and “noncurrent liabilities.” Current liabilities are debts the company must pay within a year (such as accrued payroll and accounts payable) and noncurrent liabilities are those not required to be paid within a year (such as long-term loans and healthcare and pension liabilities).
  • Equity (also referred to as owner’s equity or shareholder’s equity) is the total amount invested in the company by the owner(s) and shareholders.

A balance sheet is divided into two columns with assets in one column and liabilities and equity in the other. At the core of a balance sheet is a simple equation: Assets = Liabilities + Equity. As the name suggests, a balance sheet must be balanced in this way.

Balance sheets are useful for giving a quick overview of a company’s assets and liabilities and whether the company has a positive net worth. The balance sheet is most helpful when used alongside other financial reports like the income statement.

What is an Income Statement?

An income statement shows a company’s financial performance over a specific period. Income statements are typically annual or quarterly reports, though some businesses may opt for monthly or weekly reports. An income statement’s primary purpose is to show whether or not the company made a profit in the reported period – by adding the total revenue and gains and subtracting the number of expenses and losses. If the total revenue is greater than the total expenses, then the business made a profit during that period. If expenses are greater than revenue, then the business operated at a loss for the period.

Businesses can use income statements to keep track of trends in the company’s financial performance to better plan for the future.

Let’s take a hypothetical scenario of a company that produces quarterly income statements. The income statements show a profit for each quarter, however, the total profit gradually decreases each quarter as total expenses continue to increase. The company can then take action to reduce expenses where possible and increase its profitability. Had the company not noticed the trend of increasing expenses on their income statements, that trend could have continued to where its expenses eventually outgrew its revenue.

Balance Sheet vs Income Statement

Balance sheets and income statements both offer valuable information on a company’s financial health, but they differ in a few key ways. Here are five key differences between a balance sheet and an income statement.

  1. Time Covered: A balance sheet reports a company’s finances for a specific date, such as January 1, 2022. An income statement reports a company’s revenue and expenses over a specific period, such as January 1 – December 31, 2022.
  2. 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.
  3. What’s Reported: A balance sheet reports assets, liabilities and equity. An income statement reports revenue and expenses.
  4. What They’re Used For: A balance sheet is most often used by a company to see if it has enough assets to satisfy its financial obligations. An income statement is used to evaluate the company’s performance to see if it’s profitable.
  5. Determining Creditworthiness: Lenders and creditors can use a balance sheet for an overview of a company’s total assets. An income statement can serve as proof that a company is profitable and can pay any liabilities.

Because of these differences, balance sheets and income statements are most effective when used together (along with other reports) to give you the best possible overview of your company’s financial situation. Doing so will position you well to make informed decisions about your company’s future.

Count on Society Insurance

Understanding both the intricacies of your business as well as the larger picture of how businesses are conducted will help guide you to success. Standard operating tools such as balance sheets and income statements can be new to aspiring entrepreneurs, but they’re of utmost importance to understand.

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The Difference Between a Balance Sheet and an Income Statement | Society (2024)

FAQs

The Difference Between a Balance Sheet and an Income Statement | Society? ›

A balance sheet indicates a company's financial condition on a specific date. It's a look at the company's assets, liabilities and equity at that particular moment. The income statement tells us how the company is doing over time, generally a one-year period with an end date of December 31.

What is the difference between a balance sheet and an 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.

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

An income statement shows the financial status of an organization over time (usually 1 year), whereas a balance sheet shows the financial status at a given point in time.

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

A balance sheet shows a company's assets, liabilities and equity at a specific point in time. An income statement shows a company's revenue, expenses, gains and losses over a longer period of time.

What is the difference between the balance sheet and the statement of accounts? ›

Accounts prepare balance sheets are generally simpler than financial statements, as they only include three categories (assets, liabilities, and equity), while financial statements can be more complex. Balance sheets may be required by law or accounting standards, while financial statements are usually required by law.

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

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 more important, a balance sheet or an income statement? ›

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.

What is the difference between the income statement and balance sheet in regard to timing? ›

While an income statement looks at data for a specific period such as a month or a year, the balance sheet is a snapshot of financial data at a specific point in time. Your company's balance sheet provides a look at your business assets and liabilities at the time of reporting.

What is the main difference between balance sheet and budget? ›

All Answers (2) Simply the budget is a plan for future, with estimated values, but the balance sheet reflects historical values, actual values. As for the budget is a document summarizing the revenue and projected expenses determined and quantified for a future financial year.

Are creditors external or internal users? ›

Creditors and governments are external users of financial statement.

Is equipment a current asset? ›

Equipment is not a current asset, it is classified in accounting as a “Noncurrent asset”. Noncurrent assets, such as buildings and equipment, are assets needed in order for a business to operate, with no expectation that they will be sold or converted to cash. Noncurrent assets are also referred to as “Fixed Assets”.

Do expenses increase owner's equity? ›

The main accounts that influence owner's equity include revenues, gains, expenses, and losses. Owner's equity will increase if you have revenues and gains. Owner's equity decreases if you have expenses and losses. If your liabilities become greater than your assets, you will have a negative owner's equity.

What does the income statement show? ›

An income statement shows a company's revenues, expenses and profitability over a period of time. It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement. It shows your: revenue from selling products or services. expenses to generate the revenue and manage your business.

What is the purpose of an income statement? ›

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 are the golden rules of accounting? ›

The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.

What comes first, a balance sheet or an income statement? ›

The financial statement prepared first is your income statement. As you know by now, the income statement breaks down all of your company's revenues and expenses. You need your income statement first because it gives you the necessary information to generate other financial statements.

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.

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