Many business owners are confused about whether the income statement and balance sheet are the same. Actually this both are types of financial statements. Financial statements play a crucial role in Business success. Every Business Owner needs to know financial skills to maintain their financial records to grow their business. In this article, we understand the difference between Income Statement and Balance Sheet, learn about the features of Income Statement and Balance Sheet, and understand the role of both and how Income Statement and Balance Sheet are useful for business.
What is an Income Statement?
The income statement works only fixed period, like quarterly and annually. It helps to record the revenue of your company, such as profit, expenses, and losses. That’s why many people say the income statement’s secondary name is the profit and loss statement. The main purpose of the income statement is to reveal the financial performance and profitability over a specific period. Business owners use this income statement to keep track of the financial reports of the company and decide on a better plan for the future.
Core features of the Income Statement
Features of the income statement help to make a business health strong and reliable, and enhance the growth of the company.
- Periodicity: This means the business owner creates an income statement for reporting the financial performance for a specific period, like as quarterly and yearly.
- Profitability: The Income statement shows the company’s revenue and shows the company’s profit and loss. This profit and loss statement helps to make decisions for the future and enhance the company’s growth.
- Comprehensive View: It provides all the details of the source of income and the type of costs and expenditures in the business.
Uses of the Income Statement
- Help with monitoring operational effectiveness and make a strategic adjustment for controlling spending.
- Verify the company’s sources that help to earning power and calculate the ratio of earnings per share and record their value.
- Assess the company’s ability to generate enough profit to repay debts.
- An income statement is used to understand a company’s overall financial health, and business owner use this to compare with their competitors.
What is the Balance Sheet?
The Balance Sheet is a part of the financial statement that helps to record and make reports of a company’s assets, liabilities, and shareholders’ equity, and share them at a specific point in time. It creates a snapshot of the company’s financial health and shows what it owns, what it owes, and also shows the owner’s stake. The Balance Sheet works based on the fundamental accounting equation means Assets = Liabilities + Shareholders’ equity.
Core feature of Balance Sheet
The balance sheet plays a crucial role in recording a Business’s financial health. So there are various features of the balance sheet.
- Financial Snapshot: In this feature, it takes a snapshot of assets, liabilities, and equity at a specific point, not over the period, which shows the financial position of the company.
- Accounting Equation: The Balance Sheet helps to balance the company’s financial health and adhere to assets = liabilities + Equity. This equity should be owner equity and shareholder equity.
- Structure: The structure of the balance sheet is presented with current assets on one side and liabilities plus equity on the other.
- Liquidity & Solvency: Helps assess a company’s ability to meet short-term (liquidity) and long-term (solvency) obligations.
Uses of Balance Sheet
- Monitoring the overall performance and, as on the performance results, managing the assets that help to plan for expansion.
- Investors also use this balance sheet to analyze the financial stability and creditworthiness, and then return the effective potential to the business.
- The balance sheet is used for tracking the performance and comparing it over time, which shows trends in assets, liabilities, and equity, indicating growth or underperformance.
- Use to calculate the other statements and compute the crucial ratio for performance analysis.
- It is used in an essential business plan or future projection.
- Helps managers invest wisely and aids lenders in assessing loan risk.
Difference Between Income Statement and Balance Sheet
Have a clear look at the differentiation of the income statement and balance sheet steps.
Income Statement
- The purpose of the income statement record the company’s profitability over a specific period. That record statement shows how much revenue the company earns and the costs and expenses incurred to generate that revenue.
- The timing of income statements is basically prepared for regular intervals, such as quarterly or annually. It shows the dynamic aspect of a company’s financial performance.
- There are three major sections in an income statement including revenue, expenses, and net income. Revenue is listed in sales or services, Expenses are listed in operating and non-operating, and Net income is listed in Profit and Cash flow.
- It continuously reports to offer insight into a company’s financial performance. An income statement helps assess the operational efficiency, identify trends, and make informed decisions.
- Income statements measure a company’s performance and profitability over a specific time frame. They help investors and management evaluate whether the company generates profits and how efficiently it operates.
Balance Sheet
- The main purpose of a balance sheet is to help show what a company owns, like assets, and owes liabilities at a specific point in time, and provide a static view of the company’s financial health.
- Basically, Balance sheets are created when the reporting period ends, such as a fiscal quarter or year. Business owners create a balance sheet for this purpose that helps to reveal the cumulative effect of a company’s financial activities over time.
- There are three major sections balance sheet follow-up like assets, liabilities, and shareholders’ equity. Assets are listed in order of liquidity, and the equation Assets = Liabilities + Equity must always balance.
- Balance sheets provide valuable information for investors and creditors, which is why balance sheets are disclosed less than the income statement. It helps to assess a company’s liquidity, solvency, and overall financial stability.
- A balance sheet only focuses on the financial position and stability of the company, but it indirectly reflects a company’s financial performance.
Conclusion
At the end income statement and balance sheet are not the same; it’s a type of financial statement that shows a company’s growth, profitability, stability, and performance. With the help of this article, you can easily understand the difference between the income statement and balance sheet. So, go through this perfect guide to resolve your queries.