How a balance sheet differs from an income statement
A company or organization that has stakeholders or shareholders must prepare an annual financial statement in order to let those involved know the financial health of the business. There are different components to a financial statement, two of which are balance sheet and income statement. Even though they have similarities and differences, they are used side by side to communicate the financial information about a company’s investments.
The balance sheet is perhaps the most important component of a financial statement because the bottom line of this statement tells what the company’s cash flow balance actually is. It is a statement that tells whether or not the company is financially healthy at the time the sheet is prepared. There is a specific order in which information is listed on the sheet regarding the assets and liabilities of the company. The order in which they are listed is assets, liabilities, and equity. The liquid assets are listed at the beginning and the most pressing liabilities (bills that have to be paid) are listed before the smaller and less pressing ones.
This refers to all the transactions that the company has made for the period of the financial statement and is a list of the resources that it has. Assets are items that the company can liquidate for cash if necessary. They include such things as the buildings, machinery, furniture, copyrights and patents as well as accounts receivable.
A company’s liabilities are its debts and expenses – the obligations that it has that result in the outflow of money. Examples of liabilities include dividends paid to the shareholders, interest on loans, and income tax.
The equity is the part of the assets that the owner claims. It refers to what is remaining after all the liabilities have been met. It is a statement of the earnings of the company.
The income statement is the statement of profit and loss and is a picture of the company’s performance over the time period reflected in the financial statement. All the profits are listed as well as all the losses. The money that has come into the company through transactions and the money it has spent through expenses and liabilities are the two main components of this statement. When all are listed and totaled the lower number is subtracted from the higher number to show an overall profit or loss.
Income results from sales or decreased liabilities when debt is repaid or lowered. It is a statement of economic activity that benefits the company and is shown in the statement as a listing of revenue and gains.
Expense is the opposite of income because it refers to the money the company paid out during the period. It includes everything that the company had to pay for, including the salaries of the employees.
- A financial statement has two main components – a balance sheet and an income sheet.
- The income statement reflects the financial activity for a specific period of time, usually a year, but the balance sheet reflects all the activity for the company from the time that it started.
- The result of an income statement is to show the company’s profit and loss and come to a conclusion about its financial health, but a balance statement is a listing of the assets, liabilities and equity.