A statement of income and the balance sheet are the same? This isn’t exactly true. Both accounts give an insight into your firm’s finances, and each statement has its own set of characteristics. The income statement and the balance sheet are looked at by stakeholders of the company and are made by qualified financial managers.
In the event of a given period, your income statement will record the income and spending. At the same time, on a specific date, a balance sheet includes the illustrated version of the assets and liabilities of your organization. Apart from time restrictions, there are also some other variations between a statement of income and a balance sheet.
The Balance Sheet
The balance sheet of your company looks at your business assets and responsibilities for the reporting period. Assets and liabilities differ from the income and expenses variables: The assets are the properties of your enterprise. All physical property, including machinery, automobiles, trucks, and inventories, are viewed as assets. Cash is likewise an asset, as are all your company’s investments. Assets are frequently recorded on the balance sheet.
The inventory is listed as rapidly as possible in cash. Liabilities differ from expenses because they will also be responsible for future money. For instance, for rent, both a cost and weakness can be considered. In the rent previously paid during that period, the rent will be calculated as an expense on the income statement.
The Balance Sheet Includes
The balance sheet is based on the balance sheet equation, in which, on the one hand, equity plus liabilities are equal to assets on the other hand.
Assets = Liabilities + Equity
A corporation must either take a credit (liability), take it from an investment person (issue shareholders’ capital), or take it out of a retained earnings, and then pay for all it possesses (assets). It is intuitive. If a corporation borrows for five years, for example, the bank’s $5,000 loan will not only raise its liabilities by US$5,000 but its assets as well. Similarly, the company will enhance its assets and equity by taking $10,000 from the investors.
$15,000 (Assets) = $5,000 (Liabilities) + $10,000 (Equity)
The balance sheet demonstrates how a corporation implements its assets and how they are financed according to the liabilities section. Because banks and investors evaluate the financial statements to determine how the company uses its resources, they should be updated monthly.
The Income Statement
The statement of income illustrates the number of revenues that your company gained over a particular time period and includes the costs connected to the business. The charging costs for items supplied, running expenditures (for instance, marketing, company development, administrative costs), and taxes are often covered by expenditure. After all of these variables are considered, you are left with what your company gained or lost over the particular period.
The operating component of the statement of income generates a benefit and a loss for a period, usually being closely examined by investors and lenders. It gives vital information and demonstrates the efficiency and performance of the company compared with its contemporaries in the industry. Basically, the income statement is intended to determine if your firm sells items and/or services that are profitable once all the expenses related to running a business considered out.
The Income Statement Includes
Revenue, items sold, and operating expenses are included in the income statement, together with the resulting net income or loss for the period. Non-operating costs are not tied to significant corporate transactions such as depreciation or interest charges. Similarly, operating revenues are revenues generated by primary activities, whereas non-operating revenues are revenues other than core operations.
The Differences
- We may perceive the difference in what exactly each report reports.
- The income statement gives an image of the firm; of how well you performed during a certain period, while a snapshot of the company’s assets and liabilities is available in the balance sheet at a specific time.
- A balance sheet provides an instantaneous picture of your financial figures.
- The income statement however tells a story like a video based on a time period regarding the net income. It starts by telling us about the revenue of the company, then gives the idea about expenses and finally ends at net profit or loss for that time period.
- A balance sheet has three main components.
Assets – Includes all the company’s assets and can gain future benefits from like cash, plant, machinery, inventory, etc.
Liabilities – This section includes all the liabilities of the company; that the company owes to other companies or individuals.
Equity – This section gives insights on the capital invested by owners, retained earnings, and share capital of the organization.
- The income statement is a snapshot of the company’s revenue and expenditures which tells us about the net income or loss for a period.
Conclusion
Although there are many differences between the income statement and balance sheet, they share some main characteristics in common. They comprise up to three main financial statements, together with the cash flow statement. And even if utilized in various ways, creditors and investors use both statements to decide whether they want to get involved in the company or not. Although we conclude that the revenue and balance sheet are used for assessing different information, we believe that both statements play a significant role for banks and investors as they are a solid indication of the enterprise’s financial health, both current and future.
