Updated November 23, 2023
Difference Between Income Statement and Balance Sheet
The main difference between an income statement vs balance sheet is that the income statement shows a company’s earnings (revenue) and spending (expenses) in one year. In contrast, the balance sheet shows what a company owns (assets), what it owes (liabilities), and its equity value at a specific point in time.
The income statement and the balance sheet provide different but complementary information about a company’s financial performance and position. Investors and analysts typically use both statements together to understand a company’s financial health.
Income Statement Vs Balance Sheet – Infographic
Below is the table highlighting the key differences between the income statement vs. balance sheet.
Income Statement Vs Balance Sheet – Example
For example, Let’s consider a retail store that functions in your locality.
The income statement for the retail store would show the revenues generated by the store from the clothing sales, e.g., $100,000. It will also show expenses incurred to run the store, such as rent, salaries, inventory, marketing, and other expenses totaling $80,000. Finally, the difference between the revenues and the expenses would be the store’s net profit for the period, i.e., $20,000.
On the other hand, the balance sheet for the retail store would list the store’s assets of $50,000, such as cash, inventory, furniture, and equipment. Then, it will present the store’s liabilities of $20,000, such as loans, accounts payable, and taxes owed. At the end, it would list the store owner’s equity of $30,000, which represents the amount of money invested by the owner in the store.
Income Statement Vs Balance Sheet – Key Differences
- An income statement helps assess a company’s profitability and operational performance, while a balance sheet is useful for assessing a company’s financial health and overall worth.
- While the income statement emphasizes profitability and efficiency, the balance sheet emphasizes liquidity, solvency, and financial flexibility.
- Investors and analysts use income statements to understand the company’s ability to generate profits. It helps them make decisions about investing or lending to the company. On the other hand, a balance sheet helps them assess a company’s ability to meet its short-term and long-term obligations.
Final Thoughts
When it comes to financial statements, the income statement and balance sheet are two of the most important statements that give insights into a company’s profitability and financial health, respectively. While both statements are essential, they have their respective uses. For instance, if assessing the long-term financial health and stability of a company, the balance sheet becomes highly significant. If evaluating the company’s performance and profitability trends, the income statement takes precedence.
Frequently Asked Questions (FAQs)
Q1. What do companies prepare first – a balance sheet or income statement?
Answer: Companies usually build and present the income statement first, summarizing a company’s sales and expenses. After that, companies create the balance sheet.
Q2. What are the three types of financial statements?
Answer: There are three sorts of financial statements:
- Income Statement: It illustrates a company’s revenues and costs over a specified time period and calculates the resulting net income or loss.
- Balance Sheet: It depicts a company’s financial situation at a given point in time by displaying its assets, liabilities, and equity. It gives an overview of the company’s financial health.
- Cash Flow Statement: It shows the cash and cash equivalents a business receives and spends over a certain time period. It is useful in determining a company’s liquidity and ability to satisfy financial obligations.
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