Many business owners think that both income statements and balance sheets record the same data about his/her business. But both of them have different sets of variables.
Both income statement and balance sheet gives us a complete overview of the financial status of a company but in different ways. An expert financial manager will always look at both reports in order to know the financial status of the company.
The income statement of a company records the income and expenses for a particular period of time. And the balance sheet records the assets and liabilities of the company for a particular period of time. Both reports help to measure the health of your business. So you should know that how they differ from each other, and how they play a big role to maintain finance.
Today in this article we will help you to know about income statements and balance sheets and to know the differences between them. Read the article till the end. This will make sure that you properly know about the differences between the income statement and the balance sheet.
Comparing Income Statement and Balance Sheet
The income statement of a business gives an overall view of the income of your business in a particular period of time. Whereas the balance sheet is like a snapshot of the financial information of your business in a particular period of time.
Now we will discuss the income statement and balance sheet separately so that you can compare both of them and clearly visualize the difference between both the income statement and balance sheet
What is Income Statement
An income statement can also be called a Profit and Loss statement. The income statement of a business records the amount of revenue earned by a company in a particular period of time i.e. in a year or quarterly. The amount of revenue recorded by the income statement consists of the income earned by the company and also the expenses related to the income of the company.
The expenses which are generally included in the income statements are
- Costs of the goods sold (COGS)
- Marketing expenses
- Administrative expenses
- Business development expenses
When you enter all the variables associated with your income and expenses, you will be able to visualize the complete picture of whether your company has earned profit or your company faced loss during a particular period of time. This can also be referred to as the “Bottom Line”.
The Bottom line will give you a clear picture of whether your company has earned profit or your company faced loss during a particular period of time. Thus an income statement will help you to understand whether the products, services, and offers provided by your company are profitable or they are causing severe loss to your company.
You must always focus on the true trends over time rather than just looking at the inventory balance and gross profit margin because they don’t give you the proper reflection of the financial status of your business. They don’t help you to track the amount of money coming in and going out of your business.
What is Balance Sheet
A balance sheet gives you a clear picture of the assets, liabilities, and equities of your company. In an income statement, we see that the data of a particular period of time i.e. monthly or quarterly, or yearly is recorded but in the balance sheet, we will see that the financial data of the company for a particular period of time is recorded.
The balance sheet mainly focuses on the assets, liabilities, and equity of your company at the time of reporting. The assets and liabilities of a balance sheet are completely different from the variables of an income statement.
Now let us have a look at how the assets and liabilities of a company in a balance sheet are different from the variables i.e. incomes and expenses which are included in the income statement of a company.
The items, cash, or anything that a company owns is known as its Assets. For example, the trucks, cars, other vehicles, inventory, the machinery of the company, etc are considered as Assets of a company.
The amount of cash or money that is used as investment by your company can also be considered as the Assets of that particular company. Assets are mainly recorded in the balance sheet of the company in the order of how fast the assets can be converted into cash.
In the balance sheet of the company, the inventory is recorded at the top because it can be easily and very quickly converted into cash. Then we will see that the non-current assets and fixed assets are recorded just below the inventory in the balance sheet of the company. The non-current assets and fixed assets include the following substances
- Electronic machines and equipment.
- Office furnitures
- Other important materials which are not generally converted into cash but can be converted into cash if required.
The amount of money or cash that your company owes to other external people or any other company is known as Liabilities. For example, the amount of money taken as a loan from banks, the amount of money borrowed from other individuals, the amount of money owed to different suppliers, taxes, etc are considered as Liabilities of a company.
Liabilities and expenses are two different things because liabilities also include the future money owed. Let us take an example, Rent can be considered as both expenses and liability. In the income, statement rent is considered as an expense for the amount of rent that is already paid in that particular period.
On the other hand, rent is considered as a liability in the balance sheet because you owe some amount of money each month for rent i.e. it is future money owed to another individual. You must make sure that the balance sheet does not have any balances that don’t make sense.
We hope that now you completely know about the Income statement and Balance sheet of a company and the difference between them. The guidance provided in this article will definitely help you to know about the Income statement and Balance sheet of a company and the difference between them. You must have a clear idea about the variables included in an Income statement and the entries listed in a Balance sheet. We recommend you read the entire article without skipping a single point.