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 statements and balance sheets give 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 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 an 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 income statement shows:
- Sales
- General cost
- Gross profit
- Earnings before tax
- Other income & Expenses
- Net operating income
- Net Income
The expenses which are generally included in the income statements are
- Costs of the goods sold (COGS)
- Marketing expenses
- Administrative expenses
- Business development expenses
- Taxes
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 losses 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 a 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 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.
Balance sheets that show your assets include:
- Account balances
- Fixed assets
- Intangible assets
- Accounts receivable
- Inventory on hands
Liability includes
- Accounts payable
- currents liabilities
- Shareholders equity
- Long term liabilities
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 furniture
- Other important materials 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 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 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.
Final Words
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.
FAQs
Which comes first the income statement (profit & loss) or the balance sheet?
If you prepare the overall financial data to know the financial health of the company then you should prepare the Income Statement first. It shows the total income or revenue that generates against the expenses that were paid in the specific time period. On the other hand balance sheet contains everything that is not included in the income statement. So you need to show the equity in the balance sheet, and it extracts after generating the income statement.
Is an income statement necessary before the balance sheet?
If you are preparing the financial statement of your organization then it is necessary to prepare it in sequence because it is essential to carry over the data in the next process to know the actual financial health of your organization. It is followed by preparing the trial balance first then the income statement and the last balance sheet, the statement of owner’s equity also followed by most companies.
What are the five main elements of the balance sheet?
The elements of the financial statement are as follows:
Assets: Assets represent the value of the things or the company that can be converted into cash. It is a resource for the company that possesses control over that and could be sold for money. It includes accounts receivable, inventory, and fixed assets.
Liabilities: Any debts your company has to pay at the end of an accounting period, These are financial obligations that are necessarily paid by the company. Example tax payable, wages payable, and accounts payable.
Equity: Equity is the amount that is invested by the owner which is the difference between the assets and liabilities.
Revenue: It is the total amount of income generated through sales of goods and services.
Expenses: The operational costs that are incurred to generate business revenues are referred to as expenses in accounting. Like, as utility expenses, compensation expenses, and interest expenses.