{"id":482,"date":"2023-04-18T08:37:41","date_gmt":"2023-04-18T08:37:41","guid":{"rendered":"https:\/\/www.smallbizgenius.net\/?p=482"},"modified":"2023-06-19T07:45:41","modified_gmt":"2023-06-19T07:45:41","slug":"balance-sheet-vs-income-statement","status":"publish","type":"post","link":"https:\/\/www.smallbizgenius.net\/knowledge-base\/balance-sheet-vs-income-statement\/","title":{"rendered":"Balance Sheet vs. Income Statement &#8211; Explanation and Examples"},"content":{"rendered":"\n<p>As a business owner, you will be expected to produce three primary financial statements for each accounting period. Given that they each have a crucial role in tracking your company\u2019s financial performance, you\u2019ll need to be able to compare a balance sheet vs. an income statement and know what a cash flow statement is.<\/p>\n\n\n\n<p>Whether you\u2019ve just launched your business or want to play a more active role in handling your accounts and financial reporting, this guide will provide the info that you\u2019ll need.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">An Explanation of Balance Sheets and Income Statements<\/h2>\n\n\n\n<p>There are over 32.5 million businesses in the US, and they all need to satisfy their obligations for accurate financial reporting and accounting. Before looking at a balance sheet example or a sample income statement, you must first know what they are and how they function.<\/p>\n\n\n\n<p>The basic definitions of the main types of financial statements are as follows:<\/p>\n\n\n\n<ul>\n<li><strong>Balance sheet<\/strong>: a balance sheet provides a snapshot of the company\u2019s financial health at any given moment. It will detail its assets and liabilities to calculate equity and your ability to cover financial exposures.<br><\/li>\n\n\n\n<li><strong>Income statement<\/strong>: an income statement details the company\u2019s total revenues and expenses over an extended period to underline the company\u2019s overall performance and profitability.<br><\/li>\n\n\n\n<li><strong>Cash flow statement<\/strong>: the <a href=\"https:\/\/corporatefinanceinstitute.com\/resources\/knowledge\/accounting\/statement-of-cash-flows\/\" target=\"_blank\" rel=\"noreferrer noopener\">cash flow statement details<\/a> all the monies received by the company, which covers operations, investment, and financing from ongoing operations and external investments.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>While all financial reporting tools are used to determine where the company stands from a financial perspective, there are distinct contrasts in what they are used for. For example, balance sheets detail what the company owns and owes to see how effectively debt is used to leverage success.<\/p>\n\n\n\n<p>Conversely, an income statement tracks both revenue and expenses to outline whether the company is operating in a way where income outweighs the outgoing expenses. A cash flow statement checks that capital is available. This is a crucial consideration since over a third of small businesses in the US claim they need more cash to operate better.<\/p>\n\n\n\n<p>In other words, it\u2019s not about the usefulness of a&nbsp; balance sheet vs. income statement accounts; it\u2019s about using both of these financial tools together with cash flow statements to get a better picture of a company\u2019s financial health.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Is Included in a Sample Balance Sheet?<\/h2>\n\n\n\n<p>Before learning how to read a balance sheet, you will need to know what is included on it and what each aspect relates to. Even if you use the best <a href=\"https:\/\/www.smallbizgenius.net\/best-tax-software-for-tax-preparers\/\">tax software<\/a> on the market, this knowledge will be vital for extrapolating crucial information. A balance sheet will show your:<\/p>\n\n\n\n<ul>\n<li>Assets include account balances across checking and savings, accounts retrievable from what people owe you, fixed assets like equipment, inventory, and intangible assets like copyrights.<\/li>\n\n\n\n<li>Liabilities include accounts payable to other companies and both current and long-term liabilities.&nbsp;<\/li>\n\n\n\n<li>Equity &#8211; this covers all aspects of the shareholder equity, including net assets, revenue, and invested capital.<\/li>\n<\/ul>\n\n\n\n<p>Recording all assets and liabilities and placing them into their categories, such as current and long-term assets\/liabilities, will enable easy reading of the accounting balance sheet. Any such sheet will need to cover five key areas:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Current Assets<\/strong><\/h3>\n\n\n\n<p>All current assets (highly liquid assets that can generate value within 12 months) should be listed in the first part of the balance sheet. Some of the items that may be listed in your account include:<\/p>\n\n\n\n<ul>\n<li>Cash reserves<\/li>\n\n\n\n<li>Short-term investments<\/li>\n\n\n\n<li>Accounts receivable<\/li>\n\n\n\n<li>Inventories<\/li>\n<\/ul>\n\n\n\n<p>The top of this list should include a \u201cTotal Current Assets\u201d figure.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Long-Term Assets<\/strong><\/h3>\n\n\n\n<p>The second section should cover the long-term assets, which are low liquidity items that offer their value in a year or more. Some examples are:&nbsp;<\/p>\n\n\n\n<ul>\n<li>Long-term investments<\/li>\n\n\n\n<li>Property and land<\/li>\n\n\n\n<li>Long-term equipment<\/li>\n\n\n\n<li>Intangible assets<\/li>\n<\/ul>\n\n\n\n<p>The top of this section should include a \u201cTotal Long-Term Assets\u201d figure.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Current Liabilities<\/strong><\/h3>\n\n\n\n<p>The next section will list current liabilities, which are due within the next 12 months. Examples include:<\/p>\n\n\n\n<ul>\n<li>Accounts payable to suppliers<\/li>\n\n\n\n<li>Accrued liabilities like employee tax withholdings<\/li>\n\n\n\n<li>Unearned revenue<\/li>\n<\/ul>\n\n\n\n<p>A \u201cTotal Current Liabilities\u2019 figure should be added to the top of this section.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Long-Term Liabilities<\/strong><\/h3>\n\n\n\n<p>Next up is the liabilities that are not due soon. This section should&nbsp; include the following:<\/p>\n\n\n\n<ul>\n<li>Long-term debt from bank loans<\/li>\n\n\n\n<li>Wages, taxes, and dividends<\/li>\n\n\n\n<li>Rent and utilities<\/li>\n<\/ul>\n\n\n\n<p>The \u201cTotal Long-Term Liabilities\u201d figure should be added too.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Shareholder\u2019s Equity<\/strong><\/h3>\n\n\n\n<p>The final section of the balance sheet should detail the following:<\/p>\n\n\n\n<ul>\n<li>Retained earnings that are reinvested or used to pay off debts<\/li>\n\n\n\n<li>The shareholder equity, which is assets &#8211; liabilities.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>With all of these sections completed, the balance sheet will be ready to file.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Is Included in a Sample Income Statement?<\/h2>\n\n\n\n<p>Any good Income statement example should give a clear insight into the financial performance of the company over a longer period. This is because it details both expenses and revenue. It will usually include the following data:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Net Sales<\/strong><\/h3>\n\n\n\n<p>This figure is pretty self-explanatory and covers the revenue gained across all channels.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Other Income<\/strong><\/h3>\n\n\n\n<p>This refers to income that falls outside of revenue from sales. When added to the net sales, it should provide a \u201ctotal revenue\u201d figure.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Costs of Goods Sold<\/strong><\/h3>\n\n\n\n<p>After the revenue figures, the income statement will list the cost of producing goods, including related services.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>General Admin Costs<\/strong><\/h3>\n\n\n\n<p>Next, it will be necessary to detail the expenses not directly linked to your production costs. This can be followed by depreciation and amortization to gain a \u2018total costs and expenses\u2019 figure.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Operating Income<\/strong><\/h3>\n\n\n\n<p>This figure comes directly after the total costs and expenses. It details the profits made through business operations after subtracting wages and depreciation.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Net Interest Expense<\/strong><\/h3>\n\n\n\n<p>This covers the company\u2019s debt servicing cost and may be added to loss on extinguishment of debt. This cumulative figure is then subtracted from the operating income to show the pre-tax income, followed by a line to show the tax payment or benefit.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Net Income&nbsp;<\/strong><\/h3>\n\n\n\n<p>Finally, the net income will confirm the company\u2019s profits or losses for the period in question. As with all figures in the financial reporting documents, a number displayed in brackets indicates a negative value.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">A Closer Look at the Difference Between an Income Statement and a Balance Sheet<\/h2>\n\n\n\n<p>Both documents can be very useful for your in-house financial management practices, and both will be scrutinized by accountants, investors, and partners. However, one of the main differences is that the income statement is dedicated to analyzing the company\u2019s performance over a period of time, while a balance sheet looks at what the company currently possesses to confirm that it can meet its obligations.<\/p>\n\n\n\n<p>It should also be noted that the income statement has to come before the balance sheet. You cannot work out the equity without first knowing whether your income outweighed the overheads or vice versa. The numbers detailed in the income statement will be included in the balance sheet, but it also adds assets and liabilities that were not covered in the income statement.<\/p>\n\n\n\n<p>But while the income statement feeds into the balance sheet and contributes to the statement of the owner&#8217;s equity, you should not fall into the trap of thinking that the latter is more important. Ultimately, it is the income statement that first shows whether the company is performing well or needs to address issues.&nbsp;<\/p>\n\n\n\n<p>Likewise, this will be one of the most important features when considering expansions or major investments &#8211; because a company that isn\u2019t already doing well shouldn\u2019t be thinking about expansion.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Final Words<\/h2>\n\n\n\n<p>As far as financial reporting is concerned, both the balance sheet and the income statement help explain the company\u2019s financial standing. Understanding the relationship between an income statement and a balance sheet will put your company in a far stronger position.<\/p>\n\n\n\n<p>When utilized well, they won\u2019t just help you comply with legal obligations but also help the accounting process and facilitate making better decisions.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>As a business owner, you will be expected to produce &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/www.smallbizgenius.net\/knowledge-base\/balance-sheet-vs-income-statement\/\"> <span class=\"screen-reader-text\">Balance Sheet vs. Income Statement &#8211; Explanation and Examples<\/span> Read More \u00bb<\/a><\/p>\n","protected":false},"author":30,"featured_media":483,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"","footnotes":""},"categories":[4],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts\/482"}],"collection":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/users\/30"}],"replies":[{"embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/comments?post=482"}],"version-history":[{"count":2,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts\/482\/revisions"}],"predecessor-version":[{"id":3558,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts\/482\/revisions\/3558"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/media\/483"}],"wp:attachment":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/media?parent=482"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/categories?post=482"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/tags?post=482"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}