Balance sheets and income statements are both important tools and records which give an overview of the financial position of an individual or company.
Balance Sheet vs Income Statement
The main difference between the two is the period that each takes into account to obtain their respective information. A balance sheet is a snapshot in time and gives an overview of the state of assets, liabilities, and equity (in the case of a company) at a given point in time. Normally at the end of the month. Whereas an income statement reflects the total income, expenditure, profit and loss of a given period, for example monthly, quarterly or yearly.
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 Between Balance Sheet and Income Statement (in Tabular Form)
| 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 stated (+/-) | 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 is a summary of 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 (most often monthly, quarterly or yearly) as it displays information at one specific point in 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 prepaid future expenses, and will be on the balance sheet for less than one year.
Whereas long term assets are things such as equipment, property, software, and furniture, whose monetary value is not immediately accessible to the business. On the right side of the page, will be the listed current or non-current liabilities 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 owed by the business which is expected to be paid back over a longer period, such as bank loans and long term leases.
A balance sheet is a useful 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 should instead be viewed in conjunction with other more dynamic styles of documentation.
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 totaled 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 as 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 as well.
In general, income statements are of no use to lenders, as it only shows a brief window of time rather than an entire history of profitability.
It is, however, a useful tool in detailing the cash flow and activity of a business for its stockholders, as well as offering a standardized framework with which to compare companies’ financial success across different fields and specialties.
Main Differences Between Balance Sheet and Income Statement
- Balance sheets give information about a specific point in time, like a frame from a movie, whereas income statements show figures for some time, like watching a film.
- 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, which is the stated profit or loss, however, an income statement does not have this figure.
- To prepare a balance sheet, an accountant must take into account all nominal, personal and real accounts that a business has, whereas, for an income statement, the only required accounts 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.
Conclusion
Both the balance sheet and income statement are two of the three most important financial documents of a business (the other is the statement of cash flows).
The major difference between the two is the period that the data presented accounts for, with the balance sheet just showing a point in time, versus the chosen period for an income statement.
Together, they give a good indication of the finances of any given business and allow comparisons to be done across different marketplaces and industries.
References
- 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