In businesses, various types of financial statements (such as balance sheet, cash flow statement, income statement, and statement of retained earnings) are used to learn about the financial health of a company. Out of all financial sheets, income statement and balance sheet are the two most important financial statements. in this article, you will learn about the Balance sheet versus Income sheet and what are key differences between both of them.
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What is Balance Sheet?
A balance sheet provides details of the financial balances of a company at a particular point of time. It includes various important information such as liabilities, assets, and stack holder’s equity at a given point of time. It is also called a statement of financial position.
A balance sheet shows the accounting equation
i.e. Assets= Liabilities+ Stock holder’s equity.
By looking at a balance sheet, one can determine the amount of working capital of a company. Company’s working capital is equal to the number of current assets minus current liabilities.
i.e. Company’s working capital= Current Assets – Current Liabilities
The analysis of liabilities and assets is compared with the amount of stock holder’s equity.
When a column of the last balance sheet is included in a balance sheet, it is called a comparative balance sheet.
Usually, a classified balance sheet is issued by the company. Therefore, amounts are presented as per the following classifications.
ASSETS
- Investments (Long-term)
- Current Assets
- Intangible Assets
- Property, plant, and equipment
- Other Assets
- Liabilities and Stock Holders’ Equity
Liabilities
- Current Liabilities
- Non-Current Liabilities
- Total Liabilities
- Stock Holders’ Equity
- Total Liabilities and Stock Holders’ Equity
A brief description of the classifications in a balance sheet
Current Assets
Current assets consist of cash and all those things which are expected to turn in cash within the time period of one year or less. For example, cash, short term investments, cash equivalents, inventory, accounts receivables, and prepaid expenses.
Investments
This includes all non-current and long-term assets such as cash value of life insurance, long-term investments in other companies, real estate held for sale, bond sinking funds, and all cash which is constrained for the construction of equipment and plants.
Property, Plant, and equipment
It includes everything which is used in the operations of a business such as Buildings, cost of land, equipment, machinery, fixtures, furniture, and vehicles.
Intangible assets include assets like trademarks, goodwill, copyrights, patents, and other non-physical assets which are obtained at a certain cost. However, the amount mentioned in the report must be their cost of acquisition minus any amortization. Logos and valuable trademarks which are developed by a company through advertisement and promotion cannot be reported because these are not bought from any business or individual.
Other assets
Other assets include all costs which are already paid by the company but is being expensed for over a year or more than one year. For instance, deferred income tax and bond issue costs.
Current Liabilities
Current liabilities include obligations and loans which are payable within one year of the balance sheet written. For example, accounts payable, long-term loans, liabilities for accumulated expenses, and income tax payable etc.
Noncurrent liabilities
Noncurrent liabilities are also called long-term liabilities. These liabilities are not due within one year of a balance sheet. The examples of noncurrent liabilities include portions of mortgage loans, portions of automobile loans, deferred income taxes and bond payables etc.
Stockholders’ equity
Stockholders’ equity includes treasury stock, retained earnings, and Paid-in Capital etc.
What is Income Statement?
The income statement includes the company’s expenses, revenues, net income, gains, and losses. The income statement of a company is created for a specified period of time like a year, quarter, month, or weeks etc. income statement can be presented in two formats like multiple step and single step.
Multiple step income statement includes three subtractions such as
i) The outcome of first subtraction is subtotal gross profit.
ii) The outcome of the second subtraction is subtotal operating income.
iii) The outcome of the third subtraction is bottom line net income.
Single-step income statement
Single-step income statement includes only one subtraction that is subtracting total expenses (operating as well as non-operating) done by a company from the total revenue generated by the company in a specified period of time.
Difference Between Balance sheet and Income sheet
| Balance Sheet | Income Sheet |
|---|---|
| A balance sheet is an outline of the financial balances of a company or firm at a particular point of time. | An income sheet is one of many financial statements of a company which presents the income as well as expenses of a company of a certain period of time. |
| A balance sheet tells about the financial position of a company. | An income statement tells about whether a company is making a profit or incurring a loss. |
| A balance sheet includes information such as liabilities, assets, equity, and total shareholders of a company. | An income statement includes information such as total sales, expenses, and earning done by the company per share in a particular period of time. |
| A balance sheet provides a picture of the financial position at a particular point of time. | An income statement provides a picture of total variations in the finances of a company at a particular period of time. |
| A balance sheet provides an overall view of the business to the management of a company. | An income statement provides information about the overall financial health of a company. |
This is all about the comparison between a balance sheet and income statement. However, there are a few similarities too between these financial reports. It will be helpful for an accountant to learn about these similarities too to make sure the correctness of net income appearing in reports.
