Companies produce several statements that help to determine financial health. Two of these are the balance sheet and the income sheet, which are frequently confused with one another. However, they each service a unique purpose. Learning the difference between balance vs income sheet is essential for all small business owners.
What is a Balance Sheet?
The purpose of a balance sheet is to show the assets and liabilities of a company as well as the amount of equity owned by shareholders. The term balance refers to the fact that a company’s assets should be equal to its liabilities and shareholder equity. The amount of shareholder equity is the amount left over after deducting liabilities from assets and paying all debts. This should then go to those who have purchased stock in the company.
When preparing a balance sheet, it’s a good idea to list both short-term and long-term assets.
Examples of short-term assets include:
- Accounts receivable
- Cash on hand
- Marketable securities
The following are typical long-term assets:
- Intangible assets
- Long-term investments
Accounts payable and accrued expenses are the most common types of short-term liabilities.
These are examples of long-term liabilities:
- Dividends payable
- Long-term debt
Designating short-term assets, long-term assets, short-term liabilities, long-term liabilities, and shareholder equity is important to make the balance sheet easy to read by anyone.
What is an Income Statement?
The term income statement is often used interchangeably with profit and loss statement. It shows the expenses and revenues over a specified time, which is typically on a quarterly basis. This statement tells investors whether the company has generated a profit or posted a loss for the reporting period. It also gives them crucial details about the expenses, revenue, and sales for the same time period. The typical income statement includes each of the following:
Administrative, general, and selling costs
Figures in this category represent miscellaneous costs not directly involved in the production of goods and services.
Cost of goods sold
Cost of goods sold refers to how much the company spent to produce the goods and services it made available for sale.
Also referred to as the bottom line, this is the figure at the end of the income statement that denotes the amount a company earned or lost during the reporting period.
Net interest expense
This is the total amount spent to service debt.
This figure is the difference between total revenue and total expenses.
Usually appearing on the top line, this amount refers to the total amount of sales the company posted during the reporting period.
Investors Care About Both
When it comes to balance vs income statement, the important thing to keep in mind is that both will be important to investors. The balance sheet tells them about the assets a company owns and the liabilities it owes, while the income statement shows profitability and financial health. If you would like assistance in preparing either of these statements for your business, please contact Nolan Accounting to learn more about the services we can offer you.