Table of Contents
What is Balance Sheet?
A balance sheet is one of the leading financial statements released by a company to show its financial position. It reports the assets, liabilities, and equity within a given time.
A balance sheet is called so because it always has to balance. The equation used in the balance sheet is Capital + Liabilities = Assets. This formula is derived from the fact that all assets must be paid for either through capital from the shareholder or borrowing (that is, Liabilities).
Assets are the things that, currently or in the future, have economic value to the company. They include cash or cash equivalents, inventory, account receivables, i.e., money owed by debtors, and long-term investments such as machinery, property, and others.
Liabilities are anything the company owes. They include debts e.g., from suppliers, banks, and lenders. Liabilities also include Accounts payable and accrued taxes.
Capital or shareholder’s equity is the money initially invested in the company and any retained earnings allocated to the shareholders. In the case of a company’s liquidation, capital is the money distributed among shareholders after the payment of all liabilities.
Investors and lenders use the balance sheet to assess a company’s creditworthiness.
What is Income Statement?
An income statement is also known as a profit and loss statement. It keeps track of the profitability, expenditures, and sources of revenue of a company at a given time.
There are four elements that an income statement is mainly concerned with. They are revenue, expenditures, profits, and losses.
Net income is calculated using the formula: (Revenue + Gains) – (Expenses + Losses) = Net Income. Revenue can either be operating revenue or non-operating revenue. Operating revenue is the money earned from the direct sale of a product or a service.
Expenses are all the costs that come up during a business’s normal day-to-day operations. One of the main expenses is the Cost Of Goods Sold (COGS) which is the cost incurred while producing goods and services.
An income statement helps business owners assess the profitability of their business. With information from the statement, decision-makers of a business can assess whether there is room to increase their expenses or whether they need to increase their revenue to meet their expenses.
Income statements also help investors make investment decisions. They also help creditors establish the creditworthiness of a business.
Difference Between Balance Sheet and Income Statement
- A balance sheet reports a company’s performance, while an income statement reports a company’s financial position.
- A balance sheet is prepared during the financial year’s last day, while an income statement is prepared for the whole financial year.
- A balance sheet contains assets, liabilities, and equity, while an income contains expenses, revenue, gains, and losses.
- A balance sheet is prepared after an income statement, while an income statement is prepared after.
- A balance sheet is prepared using a double-entry system, while an income statement follows its format.
Comparison Between Balance Sheet and Income Statement
|Parameters of comparison||Balance sheet||Income statement|
|Reports||Company’s performance||Company’s financial position|
|Time||Financial year’s last day||Throughout the financial year|
|content||It contains assets, liabilities, and equity||Contains revenue, expenses, gains, and losses|
|preparation||Prepared after the income statement||Prepared before the balance sheet|
|format||It uses a double-entry system where both sides have to balance||It does not use a double-entry system, and the sides do not have to balance|