Understanding the Difference Between Balance Sheet and Income Statement

The Balance Sheet and Income Statement are two of the most important financial statements companies use to report their financial performance. Though interconnected, they serve unique purposes and provide different insights into a company’s financial health.

What is a Balance Sheet?

A balance sheet provides a comprehensive snapshot of a company’s financial position at a specific point in time. It details the company’s assets, liabilities, and shareholders’ equity as of a particular date to give a sense of what the company owns and owes on that date.

The key components of a balance sheet are:

Assets – These are resources controlled by the company that hold future economic value. Assets can be tangible items like cash, accounts receivable, inventory, property and equipment. Intangible assets are non-physical resources like patents, trademarks and goodwill. Assets are listed in order of liquidity, from most liquid like cash to illiquid like buildings.

Liabilities – These are the company’s financial debts, obligations and claims owed to outside parties. Common liabilities are accounts payable, wages payable, taxes payable, accrued expenses, and long-term debt. Current liabilities are due within one year while long-term liabilities are due in over a year.

Shareholders’ Equity – Also called net assets, shareholders’ equity represents assets minus liabilities. It’s the amount left over if a company sold all its assets and paid off all its liabilities. Shareholders’ equity includes share capital (amount invested by shareholders) plus retained earnings (cumulative net income not paid as dividends).

The accounting equation underpinning the balance sheet is:

Assets = Liabilities + Shareholders’ Equity

This shows that company assets are funded by a combination of liabilities owed to creditors/banks and value owned by shareholders. Analyzing the balance sheet helps determine the company’s long-term solvency, liquidity, and use of financial leverage.

What is an Income Statement?

While the balance sheet shows a company’s assets and liabilities at a set point in time, the income statement outlines the company’s revenues and expenses over a period of time. It summarizes the financial results of business operations over a specific time frame such as a quarter or full year.

The key components of an income statement are:

Revenues – This refers to the total monies received from the sale of goods and services, interest, dividends and other sources during the stated period. This reflects the amounts billed to customers.

Expenses – These are the costs incurred by the company from business operations, interest on debt, taxes and other expenditures. Expenses are matched to the same period as the related revenues.

Net Income – Also called net profit or net earnings, this is the company’s total revenues minus total expenses. It reflects profits left over after accounting for all costs.

The income statement equates to:

Revenues – Expenses = Net Income

Analyzing the income statement shows the company’s profitability, operating efficiency and earnings quality over time. It reflects how well the company generates profits from its core operations.

Comparing Balance Sheet and Income Statement

While the balance sheet and income statement are interconnected, they have distinct differences:

  • Balance sheet shows financial position at a point in time; income statement outlines performance over a period.
  • Balance sheet summarizes what company owns and owes on a date; income statement shows revenues earned and costs incurred during the period.
  • Balance sheet has assets, liabilities and shareholders’ equity; income statement shows revenues, expenses and net income.
  • Balance sheet offers long-term financial snapshot; income statement provides short-term operating performance.
  • Balance sheet is cumulative for all activity up to that point; income statement only covers stated period.

In summary, the balance sheet and income statement provide complementary data to assess a company’s overall financial health, stability and earnings potential. Together they supply a comprehensive view into the company’s financial standing, operating results and long-term viability.