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Difference Between Balance Sheets and Income Statements?

Posted on 29/02/2024

Balance sheets and Income Statements illustrate a company’s financial status at a given time. It tracks assets, liabilities, and equity.

  • The company is the owner of all company assets. Cash, goods, investments, firm loans, and intellectual property or copyrights are included. Assets can be divided into “current assets” (cash and inventories) and “noncurrent assets” (property and long-term investments).
  • Liabilities measure a company’s debt. These include debt, taxes, loans, accounts payable, and wages. As with assets, liabilities can be “current liabilities” or “noncurrent liabilities.” Accrued wages and accounts payable are current obligations, while long-term loans, healthcare, and pension liabilities are noncurrent.
  • Equity, also referred to as owner’s equity or shareholder’s equity, refers to the total investment that the owner(s) and shareholders have made in the business.
  • Assets liabilities and equity are in separate columns on a balance sheet. Balance sheets are based on the equation Assets = Liabilities + Equity. The name implies that a balance sheet must be balanced.
  • Balance sheets provide a fast picture of a company’s assets, liabilities, and net value. Balance sheets work well with income statements.

What’s an Income Statement?

An income statement demonstrates a company’s financial performance over time. Income statements are usually annual or quarterly; however, some companies report them monthly or weekly. By summing revenue and profits and subtracting expenses and losses, an income statement shows whether the company generated a profit in the reporting period. If sales exceed expenses, the business makes a profit. If expenses exceed sales, the business loses money.

Income statements help companies plan for the future by tracking financial patterns.

Pretend a corporation produces quarterly income statements. Income statements show a profit for each quarter, but when expenses rise, the profit decreases. The corporation can then cut costs and boost profits. If the corporation hadn’t spotted the trend of rising expenses on their income statements, expenses could have outpaced revenue.

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Income Statement vs. Balance Sheet

Balance sheets and income statements provide significant financial information, but they differ in several ways. There are five fundamental differences between a balance sheet and an income statement.

Time of Coverage: A balance sheet shows a company’s finances on January 1, 2023. A balance sheet shows a company’s assets at a certain date, while an income statement shows revenue and expenses from January 1 to December 31, 2023. A company’s performance is shown in its income statement.

Balance sheets report assets, liabilities, and equity. The income statement details the money coming in and going out. The income statement is a tool for calculating the profitability of a business. An income statement determines a company’s profitability.

Determining Creditworthiness: Balance sheets provide lenders and creditors with an overview of a company’s assets. A company’s income statement can prove its profitability and ability to pay liabilities.

Because of these variations, balance sheets and income statements work best together (with other reports) to provide you with the finest financial picture of your organisation. This will help you make educated company-future decisions.

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Pramod has over 11 years of experience relating to finance and accounts in diversified industries. He is an expert in resource and process optimization resulting in greater operational efficiencies.

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