Balance sheets and income statements are both essential tools and records which give an overview of the financial position of an individual or company.
Key Takeaways
- Balance sheets display a company’s assets, liabilities, and equity at a specific time, while income statements show revenue, expenses, and profit over time.
- Balance sheets help assess a company’s financial health, while income statements measure a company’s economic performance.
- Assets must equal the sum of liabilities and equity on a balance sheet, while income statements show net income as the difference between revenue and expenses.
Balance Sheet vs Income Statement
A balance sheet is a snapshot of time and gives an overview of the state of assets, liabilities, and equity (in the case of a company) at a given time. The income statement reflects the total income, expenditure, profit, and loss of a given period, for example, monthly, quarterly, or yearly.
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A helpful way to understand the difference is to think of an income statement like a movie playing over time and the balance sheet as a single frame at the end of an important scene.
Comparison Table
| Parameter of Comparison | Balance Sheet | Income Statement |
|---|---|---|
| Time measured | A single point in time | Over an interval of time |
| Information stated | Total liabilities and assets | Revenue and expenditure |
| Balancing figure | Profit or loss is declared (+/-) | No balancing figure |
| Accounts used | Nominal, personal and real | Nominal only |
| Dynamic or static | Static. Statement made. | Shows money moving over time |
What is Balance Sheet?
A balance sheet summarizes a company’s assets, liabilities, and equity owed to owners, which explains how much net worth or capital a business has.
Most commonly, a balance sheet will be created at the end of a given period (often monthly, quarterly, or yearly) as it displays information at one specific time.
On the left-hand side of the page, a balance sheet will list the company’s current and long-term assets in descending order of magnitude, and on the right side will be the liabilities and equity.
Current assets are immediately accessible funds such as cash, accounts receivable, inventory, and future prepaid expenses and will be on the balance sheet for less than one year.
Long-term assets are equipment, property, software, and furniture whose monetary value is not immediately accessible to the business.
On the right side of the page, current or non-current liabilities will be listed in descending order of magnitude.
Current liabilities are amounts owed by the business which are expected to be settled within twelve months of the balance sheet, such as employee salaries, pending purchases accounts, taxes, and dividends to owners.
Whereas non-current liabilities are money the business owes, which is expected to be paid back over a more extended period, such as bank loans and long-term leases.
A balance sheet is a valuable tool and one of the three most important financial documents used when assessing the value of a company.
However, as it is simply a snapshot in time, it should not be used alone and instead viewed in conjunction with other more dynamic documentation styles.
What is Income Statement?
An income statement is another of the three most important financial documents when trying to keep track of business performance and for analysts to judge a company’s value.
Revenue and expenditure are detailed on the income statement in two separate sections, then totalled at the bottom of the report to give a net income for the specified period.
Items categorized under revenue include operating revenue, which is the money gained from the sale of goods and services, bank interest, and gains, such as the sale of equipment.
Underneath the expenditure section will be listed the primary activity expenses (wages, commissions, utilities, maintenance), secondary activity expenses (interest on loans), and losses as expenses, such as the sale of a vehicle for a net loss.
Once you have all this information, it is possible to determine the operating income/loss, which will be the company’s earnings before tax and is used to calculate net income.
In general, income statements are useless to lenders, as they only show a brief window of time rather than an entire history of profitability.
It is, however, a valuable tool in detailing a business’s cash flow and activity for its stockholders and offering a standardized framework to compare companies’ financial success across different fields and specialities.
Main Differences Between Balance Sheet and Income Statement
- Balance sheets give information about a specific point in time, whereas income statements show figures for some time.
- The liabilities and assets of a business are detailed on a balance sheet. However, an income statement will outline revenue and expenditure.
- When looking at a balance sheet, there will be a balancing figure: the stated profit or loss. However, an income statement does not have this figure.
- To prepare a balance sheet, an accountant must consider all a business’s nominal, personal, and accurate accounts, whereas the only required reports for an income statement are nominal ones.
- The nature of a balance sheet is also static, given it is a snapshot of a point in time, whereas an income statement is dynamic and tracks the money’s movement.
- https://www.tandfonline.com/doi/abs/10.1080/0963818022000001127
- https://academiccommons.columbia.edu/doi/10.7916/D8M332N4/download
- https://www.stern.nyu.edu/sites/default/files/assets/documents/con_046792.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
