A balance sheet and an income statement are financial tools used to manage a business’s financial performance. A balance sheet highlights its assets, liabilities, equity, and other financial investments at a given time. An income sheet, on the other hand, offers a brief overview of a business’s financial transactions including profits and losses during a given period.
Both are used together to monitor a business’s finances and make appropriate spending and investing decisions, but there are some key differences. Learn more about those below.
What’s the Difference Between Balance Sheets and Income Statements?
|Balance Sheets||Income Statements|
|Balances sheets cover assets, liabilities, and investments.||Income statements focus on revenue and expenses.|
|Balance sheets show the value of a company at a specific point in time.||Income statements show whether a company is profitable during a specific period.|
|Balance sheets are used to see if the business has sufficient liquidity to pay off debts.||Income statements are used to track the results of spending decisions.|
Balance sheets focus on what the business owns, what it owes, and what the shareholder’s investments look like. Income statements focus on how the business is spending and earning money.
On a balance sheet, a bookkeeper or business owner records the value (calculated worth) of a business at a particular time. Since it includes assets, liabilities, and investments, a balance sheet can offer an overview of what the business is worth at a specific date.
Income statements, on the other hand, provide a record of the profits and losses of a business during a fixed period such as a month. This is often used by investors to see if the company is profitable or needs more funding.
Balance sheets are used to analyze the current financial position of a business. It answers questions such as whether the company has enough assets to pay off the liabilities.
Income statements are used to track the ongoing finances of the business and analyze profits, losses, and other outcomes of past investment decisions.
While they focus on and are used for different things, most businesses use the two tools together to get a complete picture of the organization’s finances.
For instance, if you apply for a business loan, you typically have to submit financial statements including a balance sheet and income statement. Investors may also check these documents to make future spending decisions.
Using Both Statements To Assess and Improve Your Business
Using a balance sheet and an income statement together can offer much insight into the operations and finances of running your business. Here are some key things you need to look out for to assess and improve on.
Losses and Liabilities
When analyzing your balance sheet, look at the biggest liabilities; when analyzing your income statement, focus on the major losses. What’s draining the most money? What are some ways you can cut your losses or reduce the liabilities?
Profits and Assets
Focus on the profits on your income statement and the most valuable assets on your balance sheet. Take the opposite approach of what you did in the previous section. Now, analyze what’s making you the most money. What are some ways you can leverage your assets to profit even more?
Noticing the red flags in your financial documents early on can help minimize your losses and pivot toward profit before it’s too late. Here are some common red flags to look out for:
- Rising liability-to-assets ratio
- Recurring losses
- Frequent accounting errors (miscalculations, etc.)
Frequently Asked Questions (FAQs)
What is a balance sheet used for?
A balance sheet is used for tracking assets, liabilities, equities, and other investments. It can help analyze the value of a company, understand the asset-to-liability ratio, and estimate current liquidity.
What is the purpose of an income statement?
An income statement is used to track profits and losses in business transactions to record revenue and expenses during a given period. Income statements are considered for loans and investment decisions to see if the business is profitable or needs economic help.
Which is more important: the balance sheet or the income statement?
The balance sheet and income statement serve different purposes for each organization and tend to be more or less equally important, depending on what each is being used for. For instance, investors may look at equities in a balance sheet and ask for an income sheet to track profits and losses during a specific period.
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