Balance Sheet vs. Income Statement: What’s the Difference?

Balance sheet vs. income statement

Last Updated April 17, 2024

Knowing the difference between a balance sheet and an income statement is a practical necessity for running a business. For business owners, clear knowledge of these financial statements can be the difference between securing a loan or investment and missing out on growth opportunities.

But beyond raising capital, it’s also how business, large or small, simply works. As an entrepreneur, you must know the ins and outs of your finances. This helps you create strategies for cash flow, working capital management, and more. Think of yourself like a mechanic working on an engine. Educating yourself means you can keep things well-maintained, efficient, and agile to address any problems or issues.

Here, we break down the relationship between a balance sheet and an income statement.

What Is a Balance Sheet?

A balance sheet is a financial snapshot of a company’s financial condition at a specific point in time. It lists assets, liabilities, and shareholders’ equity—providing a clear view of what the company owns and owes, as well as the invested equity.

Assets on the balance sheet are typically organized as current or fixed while liabilities are divided into current or long-term. The difference between the company’s total assets and total liabilities represents the shareholders’ equity, which indicates the net worth of the company.

The balance sheet is very important for investors, creditors, and the company’s management to assess its financial stability and liquidity.

What Is an Income Statement?

An income statement, also known as a profit and loss statement, captures a company’s financial performance over a specific period—typically a quarter or year. It details revenue, costs of goods sold, expenses, and—ultimately—the profit or loss generated.

The statement begins with sales figures, subtracts the costs of doing business, and ends with the net income. It shows the company’s ability to generate profit from operations. This document is important for understanding how a company’s revenue translates into net income, providing insights into operations, pricing strategies, and cost management.

The income statement serves as a key indicator of financial health for stakeholders to evaluate profitability trends and make informed decisions.

What Goes on a Balance Sheet vs. Income Statement?

The balance sheet and income statement capture different aspects of a company’s financial health. Each has their own unique elements. Let’s compare the two below.

Elements of a Balance Sheet

Here’s what goes into a balance sheet:

  • Assets: Resources owned by the company, such as cash, inventory, and equipment.
  • Liabilities: Obligations the company must pay, including loans and accounts payable.
  • Equity: The owner’s claim after liabilities are subtracted from assets, represented by stock and retained earnings.

Elements of an Income Statement

The following is what should be included in an income statement:

  • Revenue: Income from sales or services before any expenses are deducted.
  • Expenses: Costs incurred in the process of earning revenue, including COGS (cost of goods sold), rent, and salaries.
  • Net Income: The final profit or loss after subtracting expenses from revenue, indicating the company’s financial performance over a period.

While the balance sheet provides a financial snapshot at a specific point, the income statement details the company’s operational success and ability to generate profit over time.

How to Read and Analyze a Balance Sheet and Income Statement

Analyzing a balance sheet and an income statement should be part of your cash flow audit, requiring focus to pull valuable insights about your company’s financial health. It’s crucial to know how to properly analyze these documents so you can gain an accurate picture of your business’s performance over the past quarter or fiscal year.

Follow the steps below to read an income statement and balance sheet.

Approaching a Balance Sheet

Take these steps when looking at a balance sheet:

  • Examine Assets: Start with current assets to assess liquidity, then move to fixed assets to understand long-term investments. High liquidity indicates good short-term financial health.
  • Review Liabilities: Identify the mix of current versus long-term liabilities to gauge the company’s debt levels and repayment capabilities.
  • Assess Equity: Equity levels reveal how much of the company is financed by owners versus creditors. A healthy balance supports stability and growth potential.

Approaching an Income Statement

Consider these options when evaluating an income statement:

  • Analyze Revenue: High or growing revenue indicates effective sales and marketing strategies.
  • Scrutinize Expenses: Comparing expenses to revenue highlights efficiency. Lower expenses relative to revenue suggest higher operational efficiency.
  • Evaluate Net Income: Consistent net income growth over time signifies a company’s ability to expand profitably.

By systematically examining these components, stakeholders can understand a company’s financial position and potential for sustained growth and profitability.

What Is the Relationship Between a Balance Sheet and an Income Statement?

The balance sheet and income statement are interconnected, both offering a comprehensive view of a company’s financial health. The income statement details the company’s operations over a period of time and shows how revenue is transformed into net income. This net income then feeds into the balance sheet as part of the shareholders’ equity. It shows how well operations are working.

The relationship is cyclical. Operational success or failure reported on the income statement directly impacts the equity section of the balance sheet. Additionally, investments or asset purchases shown on the balance sheet can shift future revenues and expenses, which affects overall net income.

Together, these two statements provide a dynamic picture of a company’s financial performance and condition. They demonstrate how day-to-day operations impact long-term financial stability and growth potential.

In Summary: Differences Between a Balance Sheet and Income Statement

Here’s a concise table summarizing the key differences between a balance sheet and an income statement:

Balance Sheet Income Statement
Purpose Shows financial position at a specific point in time. Reports on financial performance over a period of time.
Components Assets, Liabilities, Equity Revenue, Expenses, Net Income
Focus What the company owns and owes, and the company’s equity value. How revenues are earned and expenses are incurred to generate profit.
Timing Snapshot at a particular date. Covers a fiscal quarter or year.
Outcome Provides a basis for calculating ratios like debt to equity and current ratio. It suggests financial stability and liquidity. Highlights how well operations work through margins and profit ratios. It reflects the company’s profitability.

Balance Sheet vs. Income Statement FAQs

Does cash go on the balance sheet?

Yes, cash is listed under current assets on the balance sheet. It reflects the company’s liquidity and its ability to cover short-term obligations.

Is cash on an income statement?

No, cash does not appear directly on an income statement. The income statement records revenues and expenses, which affect the cash position but are reported separately in the cash flow statement.

Do expenses go on the balance sheet?

No, expenses are not listed on the balance sheet. They are recorded on the income statement, which shows how expenses subtract from revenue to determine net income.

Is revenue on the balance sheet?

No, revenue appears on the income statement. However, the resulting net income after expenses influences the equity section of the balance sheet.

How is an income statement related to a balance sheet?

The net income from the income statement impacts the equity portion of the balance sheet—as retained earnings are part of shareholders’ equity. This shows the direct link between a company’s operations and its overall financial position.