Balance Sheet vs. Income Statement: How Are They Different? | OnDeck (2024)

Financial health is the lifeblood of any business. There are some obvious indicators of success — good sales, manageable expenses and a growing customer base, for example. But it’s important to get as accurate a picture as you can. And sometimes it’s hard to know where to begin.

That’s where two financial statements can help: balance sheets and income statements.

A balance sheet and an income statement are two different methods of gauging a business’s financial health. They’re similar, but not the same — and both are important. In this article, we’ll define a balance sheet and income statement, explain what goes on each document, and review their differences.

Balance Sheet vs. Income Statement

The difference between a balance sheet and an income statement is the information they show and the period of time they cover.

A balance sheet shows a company’s assets, liabilities and equity at a specific point in time. An income statement shows a company’s revenue, expenses, gains and losses over a longer period of time. Along with a cash flow statement, all three financial statements work together to paint a picture of a company’s financial position.

These documents are considered essential for understanding a business’s financial health.

What Is a Balance Sheet?

A balance sheet is a document that illustrates a business’s assets, liabilities and owner’s equity during a specific point in time.

Creditors and investors look at a company’s balance sheet to understand what the company owns (assets) and owes (liabilities). The balance between those two items communicates the company’s financial health.

It’s advised to update your balance sheet every month. This way, analysts will get the most accurate snapshot of your company’s financial position.

What Goes on a Balance Sheet?

A balance sheet is based on this simple equation:

Liabilities + Equity = Assets

Unless there’s some mistake, your company’s total assets should equal its total liabilities plus equity. This is where the balance sheet gets its name — the equation is “balanced.”

On your balance sheet should be two columns: assets on one side, liabilities and equity on the other.

Not sure what fits in these categories? Here’s a breakdown of what counts as assets, liabilities and equity.

Assets. These include cash, accounts receivable, inventory and property. In simpler terms, what your company owns. Keep in mind these include intangible assets like patents or intellectual property. Assets are usually listed in order of their liquidity — how quickly they can be converted to cash.

Cash, accounts receivable and inventory are listed under current assets on a balance sheet. Property (which includes intellectual property) is listed under non-current assets.

Liabilities. These consist of loans, debt and accounts payable — what your company owes. Underfunded pension plans, such as company-sponsored retirement plans, are also included as liabilities. Deferred tax liability — accumulated taxes that have not yet been paid — also goes in this category.

Accounts payable are listed under current liabilities. Underfunded pension plans and deferred tax liability are listed under non-current liabilities. Debt can be listed as either current or non-current depending on if the debt is short-term or long-term. However, upcoming repayments on long-term debt are listed as current.

Equity. Equity is made up of assets attributed to the owners or shareholders upon the company’s liquidation, after all liabilities are paid. Shareholders’ equity also includes retained earnings.

Included in this part of the balance sheet is a return of equity (ROE). To calculate the return of equity ratio, divide net income by shareholder equity.

Balance Sheet Example

A company’s balance sheet depends on its unique mix of assets, liabilities and equity. However, a balance sheet will typically follow the same format with an itemized list provided for a specific point in time.

Example Company
Balance Sheet
(Date and Year)

Assets

Cash: $XX,XXX
Accounts receivable: $X,XXX
Inventory: $X,XXX
Property: $X,XXX

Total assets: $XX,XXX

Liabilities

Accounts payable: $X,XXX
Accrued wages: $X,XXX
Term debt: $XX,XXX

Total liabilities: $XX,XXX

Equity

Shareholder equity: $XX,XXX

Total equity: $XX,XXX

What Is an Income Statement?

An income statement is a document that illustrates a company’s financial performance over a specific period of time — usually a fiscal quarter or year. An income statement is also called a profit and loss statement.

The income statement provides information about a company’s sales revenue, expenses, gains and losses. This information is important to investors and lenders. It indicates if the company was profitable during the given time.

What Goes on an Income Statement?

The income statement includes revenue, expenses, gains and losses, and the resulting net income or loss.

An income statement does not include anything to do with cash flow, cash or non-cash sales.

Revenue. Revenue is the total income during the accounting period. It’s split into two categories: operating revenue and non-operating revenue. Operating revenue is a company’s revenue generated from main business activities, such as sales. Non-operating revenue is a company’s revenue generated from non-core business activities, such as rent or interest.

Realized gains and losses. Also included on an income statement are realized gains and losses, also known as “other income.” These are one-time gains generated from the disposal of a company’s assets, such as the sale of property.

Operating expenses. Operating expenses are regular, recurring expenses. Examples include the cost of goods sold (COGS), rent and payroll. Another type of expense is the depreciation of assets.

Net income/loss. At the end of an income statement is the net income or loss for the specified accounting period, also known as the bottom line.

To calculate net income (or loss), add realized gains and subtract expenses and realized losses.

(Revenue + Gains) – (Expenses + Losses) = Net Income

Income Statement Example

Every company’s income statement will look a little different based on their specific sources of revenue, expenses, gains and losses. This simple example should give you an idea of what to include on an income statement.

Example Company
Income Statement
For the quarter ending (Date and Year)

Revenue

Merchandise Sale: $XX,XXX
Revenue from Training: $X,XXX

Total Revenue: $XX,XXX

Expenses

Wages: $XX,XXX
Rent: $XX,XXX
Interest Paid: $XX,XXX
Utilities: $XX,XXX

Total Expenses: $XX,XXX

Gains

Income from sale of refrigerator: $X,XXX

Losses

Water damage: $X,XXX

Net Income

$XX,XXX

What Are the Differences Between a Balance Sheet and an Income Statement?

Some key differences between a balance sheet and an income statement are what’s included, time frame, purpose and use.

What’s included. A balance sheet includes assets, liabilities and equity. An income statement includes revenue, expenses, gains and losses.

Time frame. A balance sheet shows information for a specific point in time. An income statement shows information over a period of time.

Purpose. A balance sheet measures financial health. An income statement measures financial performance.

A balance sheet allows analysts to calculate financial health ratios. These include current ratio, debt-to-equity ratio and return on equity (ROE). An income statement allows analysts to calculate performance-based ratios. These include gross margins, operating margins, price-to-earnings and interest coverage.

Use. Abalance sheet is used by lenders to determine a company’s creditworthiness. It’s also used to determine if a company has assets that can be used as collateral.

An income statement is used by investors, management and others to examine a company’s current and future profitability. It’s also used to determine if a business makes enough profit to pay off short-term and long-term liabilities.

This content is for educational and informational purposes only, and is not intended as financial, investment or legal advice.

Balance Sheet vs. Income Statement: How Are They Different? | OnDeck (2024)

FAQs

Balance Sheet vs. Income Statement: How Are They Different? | OnDeck? ›

A balance sheet shows a company's assets, liabilities and equity at a specific point in time. An income statement shows a company's revenue, expenses, gains and losses over a longer period of time.

How is balance sheet different from income statement? ›

Owning vs Performing: A balance sheet reports what a company owns at a specific date. An income statement reports how a company performed during a specific period. What's Reported: A balance sheet reports assets, liabilities and equity. An income statement reports revenue and expenses.

How do you know if an income statement and balance sheet are correct? ›

So how do you know if your balance sheet is correct and does indeed balance? Your liabilities and equity, when added together, should equal your total assets. If these two figures match, your balance sheet is correct.

What are the major differences you would see on the balance sheet income statement and statement of cash flows? ›

The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.

What is the difference between the balance sheet and the statement of accounts? ›

Accounts prepare balance sheets are generally simpler than financial statements, as they only include three categories (assets, liabilities, and equity), while financial statements can be more complex. Balance sheets may be required by law or accounting standards, while financial statements are usually required by law.

What is the difference between a balance sheet and an income statement quizlet? ›

An income statement represents a firm's operating results over a period of time (a fiscal year or quarter). From another angle, a balance sheet tells a business's economic resources that creditors and shareholders can claim.

What is the difference between an income statement and a balance sheet according to the notes on understanding financial statements? ›

They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.

How do you identify an income statement? ›

An income statement is a financial statement that shows you the company's income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business.

How do you identify a balance sheet? ›

The balance sheet includes information about a company's assets and liabilities, and the shareholders' equity that results. These things might include short-term assets, such as cash and accounts receivable, inventories, or long-term assets such as property, plant, and equipment (PP&E).

What can you tell from a balance sheet? ›

The balance sheet provides information on a company's resources (assets) and its sources of capital (equity and liabilities/debt). This information helps an analyst assess a company's ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners.

Which is more important, a balance sheet or an income statement? ›

For example, while the balance sheet will provide users with information about a business's financial health at a specific point in time, it can also calculate a business's debt/equity ratio. On the other hand, an income statement tells users how profitable a business has been over a specific period of time.

What is the difference between income statement and statement? ›

Balance sheets and income statements are both financial statements that help you understand the financial health of an organization, but they have key differences. A balance sheet shows a company's immediate financial position, whereas an income statement measures performance over a period of time.

How is it different from an income statement? ›

the Balance Sheet. While the definition of an income statement may remind you of a balance sheet, the two documents are designed for different uses. An income statement tallies income and expenses; a balance sheet, on the other hand, records assets, liabilities, and equity.

What is the purpose of an income statement? ›

An income statement is a key financial document for your business. It shows what your company earns, what it spends and if it's making a profit over a specific period of time. It is also an important tool for managing your business and planning your strategy.

What do income statements show? ›

The income statement presents revenue, expenses, and net income. The components of the income statement include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-operating income and expenses; gains and losses; non-recurring items; net income; and EPS.

Why is the balance sheet more important than income statement? ›

Fundamental analysts, when valuing a company or considering an investment opportunity, normally start by examining the balance sheet. This is because the balance sheet is a snapshot of a company's assets and liabilities at a single point in time, not spread over the course of a year such as with the income statement.

What is the purpose of the balance sheet? ›

The purpose of a balance sheet is to reveal the financial status of an organization, meaning what it owns and owes. Here are its other purposes: Determine the company's ability to pay obligations. The information in a balance sheet provides an understanding of the short-term financial status of an organization.

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