Balance Sheet Vs Income Statement (Key Differences)

By Indeed Editorial Team

Published 29 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A balance sheet and an income statement are financial statements, where the former summarises an organisation's assets and liabilities and the latter records income and expenses. A balance sheet helps a business assess its funding and analyse its performance, while an income statement helps the business to measure its profit and loss. Learning about these statements can help you interpret a company's financial status or find out how companies use them to monitor profitability. In this article, we discuss the differences between balance sheet vs income statement, list their similarities and explain their importance.

Balance Sheet Vs Income Statement

Knowing the definitions of each term can help you understand the differences between balance sheet vs income statement better. Here are the definitions of both terms:

What is a balance sheet?

The balance sheet of an organisation includes assets and liabilities, along with a summary of the organisation's annual accounts. The balance sheet helps investors, creditors and shareholders to recognise the company's accurate financial standing. With this statement, internal and external stakeholders are better able to evaluate the worth of the business. Its assessment is a beneficial exercise that helps an organisation to analyse and improve its business management. Bookkeepers of an organisation may choose to prepare this statement quarterly, half-yearly or annually. Below are some metrics you may find in a balance sheet:

  • Current assets: These are assets that a business has the power to liquidate within a year. Along with these assets, a balance sheet also includes prepaid expenses, inventories and accounts receivable.

  • Long-term assets: These assets include investments, mergers and acquisitions. Some other long-term assets are real estate, stocks, facilities and equipment, restricted cash for materials and government bonds.

  • Current liabilities: A current liability is a short-term debt, which an organisation is required to pay within a year of the balance statement. Tax on income and fixed or accrued expenses are two appropriate examples of current liabilities.

  • Long-term liabilities: These are long-term payments and the loans, deeds or payable bonds a company has. If it applies to a business, it may also count deferred income taxes as long-term liabilities.

  • Shareholder equity: These are retained earnings of owners and shareholders that they receive from an organisation. These earnings may result from stocks, capital investments or government bonds.

Related: What Is A Balance Sheet? (With Template And Example)

What is an income statement?

An income statement also referred to as a profit-and-loss statement, determines an organisation's costs, revenue, spending, gains and net income. A company typically generates an income statement recording financial activities that have taken place over a year. With an income statement, it becomes easy for investors to identify if the enterprise is profitable for the statement period. A company may also include expenses in the income statement. Operating and non-operating expenses, utility bills, cost of goods sold (COGS) and employee salaries are some components of expenses. An organisation may utilise two methods to document its income and expenses:

  • Single-step: In this subtraction, an organisation performs just one calculation to remove the expenses from the period's total revenue.

  • Multi-step: This is a multi-step subtraction, where an organisation subtracts the income statement amounts thrice. The first subtraction results in the gross profit, then the subtraction offers the operating profit and the final subtraction gives the net profit.

Related: What Is A Profit And Loss Statement? (Formulas And Examples)

Differences Between Balance Sheet And Income Statement

Below are some key differences between a balance sheet and an income statement:

Period of reporting

With a balance sheet, a company reviews its ongoing activities and records changes over a short period. This can be a month, a quarter or a year. With shorter periods, the effectiveness of a balance sheet increases, as the company is able to monitor departmental functions immediately.

There may be multiple balance sheets in a financial report. These balance sheets represent the current assets of an organisation, along with liabilities that are associated with revenue-generating operations. With an income statement, a company measures its long-term financial metrics. Usually, an income statement is a financial overview of two to three years. This statement may allow a company to make long-term forecasts.

Related: How To Read A Balance Sheet (Components And Template)

Performance monitoring

With both a balance sheet and an income statement, a company may follow and analyse its specific activities. Based on this, it may pursue operational efficiency and financial competence. The company may utilise a balance statement to review liquidity and recognise if it is fulfilling short-term debt obligations.

With an income statement, a company measures its long-term performance. By utilising this statement, a company is better able to project its performance in the future and its financial position. With a balance sheet, the company prepares a short-term assessment of those operations that help the company to perform better.

Calculations

A balance sheet measures profits, losses, assets and liabilities differently than an income statement. On a balance statement, a company may add shareholder equity to present liabilities to derive assets. For instance, an enterprise takes out a loan of ₹2,50,000 over a five-year period and accrues ₹2,50,000 more in liabilities. This also means that it has ₹2,50,000 more as assets. Adding ₹2,00,000 as shareholder equity to ₹2,50,000 in liabilities, the organisation gets ₹4,50,000 as assets.

In an income statement, a company calculates net income from gross income. This happens after subtracting all the expenses, including operating or non-operating expenses. For instance, a company may perform this calculation by starting with gross income from sales. It subtracts COGS and direct expenses from the gross income. These expenses may result from varied sales activities.

Related: Assets Vs Income: Definition And Differences (With Types)

Tax documentation

With a tax variable, the reporting of the balance sheet and income statement may differ. On a balance sheet, a company usually shows tax liability or positive input tax credit as a liability or asset. Since the government collects Goods and Services Tax (GST) every month, which is an indirect tax on the supply of goods and services, a company may record this expense as part of current liabilities.

On an income statement, a company usually has profits and losses. These components may also exist with tax-related expenses. This statement differs from a balance sheet because it shows an organisation its pre-tax income or total income after clearing tax obligations.

Financial analysis

The assessment of both financial statements offers companies insight into varied aspects of business activities and operational performance. For the measurement and evaluation of short-term debt obligations, executives may utilise balance sheets. With this information, an enterprise may determine the requirement for cost-reduction strategies, enhance sales processes or improve product development operations.

Data from income statements helps investors, creditors and lenders to conduct a business evaluation. This assessment allows them to determine if a company is in a position to cover both its short-term and long-term liabilities. Income statement evaluation differs from balance sheet assessment because investors and creditors utilise income statement information to make decisions to increase the amount for additional funds.

Related: A Guide To Accrued Income (With Definition And Examples)

Similarities Between Balance Sheet And Income Statement

A balance sheet and an income statement are financial statements that an organisation prepares to document financial information. The two statements generally involve double-entry-based accounting. This means that both the balance sheet and income statement monitor accounts that document either debits or credits. If a company's equity witnesses an increase, it represents earnings on the balance sheet. If an organisation has not made an investment or has not withdrawn from the equity, it continues to utilise the income statement.

With the two financial statements, it is easier for an organisation to monitor its business performance and enterprise growth. The two financial statements help lenders to evaluate the creditworthiness of a business, which means if it possesses the ability to clear its long-term loans. Both financial statements also have an important role in compliance monitoring, as they ensure that a business is following regulatory practices.

Related: What Is A Financial Statement? (With Importance And Types)

Importance Of Balance Sheet And Income Statement

Here is why a balance sheet and an income statement are important for stakeholders:

  • To represent a company's financial position: Preparing and evaluating these statements help organisations to recognise their business performance for a specific period. Stakeholders may utilise this financial information to make strategic, data-driven business decisions.

  • To help investors to decide: When investors have a company's financial data, they are better able to make varied investment decisions. This information helps them to determine the price of a share, allowing them to make profitable investments.

  • To help lenders with getting credit: When lenders have financial information, they are better able to determine the amount they may invest in a business. This data also helps them to offer additional credit for the purpose of expanding business or identifying the company's ability to pay off its debts.

  • To monitor business transactions: A company's auditor uses these financial statements to conduct investigations into business transactions. By analysing these statements, auditors may verify the accuracy of the data.

  • To extract financial ratios: The assessment of a balance sheet and an income statement helps organisations to develop financial ratios. They may use these quotients to calculate other ratios, including profitability, estimation and solvency.


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