Income Statement vs Balance Sheet: Find Out the Difference

What Is an Income Statement?

An income statement (also known as a profit and loss statement) is a financial statement that presents a company’s overall financial health. The document presents the company’s revenue, expenses, and the profit & loss statement. This presentation is for a specific time period, typically monthly, quarterly, or yearly. Therefore, this profit & loss statement is primarily useful for evaluating business performance.

There are specific components that together create a complete income statement. Each of these components represents a specific value used to indicate company performance. The following are the key elements of the income statement:

Revenue

Revenue refers to the total amount that a company earns from the sales of products or services. It is categorized into operating revenue and non-operating revenue. Operating revenue refers to revenue generated from the company’s core operations. Non-operating revenue refers to income from activities other than operations.

Cost of Goods Sold (COGS)

The direct cost that the company incurred at the time of producing goods or delivering services. It covers material, labor, and production costs.

Expenses

Covers all types of expenses incurred by the company in its operations. It includes rent, utilities, marketing, etc. Asset depreciation is also covered in this section.

Operating Income

Operating income is the profit a business earns from its core operations. To calculate operating income, subtract operating expenses from gross profit.

Earning Before Tax (EBT)

Total profit earned by the company before paying any taxes. This financial metric represents the company’s earnings after deducting all expenses except taxes.

Net Income (Profit or Loss)

The final income that the company earns after deducting the total expenses from the total revenue.

The key equation of the income statement is as follows:

Net Income = Total Revenue – Total Expenses

Sample Income Statement

A typical income statement structure comprises sections that begin with the company’s name, date & address.

The first section presents revenue; the second, cost of goods sold; the third, operating expenses; and the fourth, operating profit. The last section shows the company’s net income.

For a better understanding of an income statement, let’s look at an income statement example. Suppose a furniture manufacturing company named Oaklin Furniture manufactures and sells furniture. Its income statement sample is as follows:

Advantages & Drawbacks of Income Statement

An income statement is one of the primary documents for understanding a company’s fiscal performance. Although it offers many benefits, it also has numerous limitations. Following the key merits and demerits:

Advantages

• Showcases the overall gain and loss of the company along with revenue and operating expenses.
• Helps investors gain quick insight into the company’s overall profitability.
• Allows professionals to quickly analyze areas that need improvement.
• Helps predict future income and plan budgets by reflecting past performance.

Disadvantages

• The income statement uses accrual accounting; therefore, it does not reflect actual cash flows.
• Financial analysis may be affected by the accounting methods and policies used.
• Complete accuracy cannot always be guaranteed, as some figures are based on assumptions and estimates.

What Is a Balance Sheet?

A balance sheet is a statement that presents a company’s assets, liabilities, and owners’ equity for a specified period. Creditors and investors utilize this document to determine what the company owns (assets) and what it owes (liabilities).

This financial document demonstrates the company’s risk profile and its ability to service its debt. Thus, it helps investors make informed decisions. Additionally, they can create financial ratios using the balance sheet, such as quick ratios and debt-to-equity ratios.

The key component of the balance sheet is as follows:

Assets

Assets are the company’s property. There are two types of assets: current assets, which are for the short term. The other is non-current assets held for more than 1 year. The key examples are vehicles, property, investments, and intangibles. Effective asset management helps optimize resources to maximize returns.

Liabilities

Every amount the company owes constitutes a liability. The company’s loans, payable taxes, employees’ wages, and other accounts payable fall under it. Liabilities also encompass obligations to provide goods or services to the customer.

Equity

Equity represents the total company’s worth that the owner or shareholders can hold after subtracting total liabilities from the company’s total assets. Shareholders’ equity is for corporations, whereas owners’ equity is for sole proprietorships/partnerships.

The key question of the balance sheet is as follows:

Assets = Liabilities + Equity

Balance Sheet Sample

A typical balance sheet comprises three sections. The topmost section represents assets, which are further classified into current and non-current. Next, liabilities appear in the middle section. This is further divided into different subcategories reflecting wages, payable debt & other long-term liabilities. The bottommost section addresses equity, with subcategories of liabilities.

Let us examine the balance sheet example using the previous Oakline Furniture company.

Advantages & Drawbacks of Balance Sheet

Just like an income statement, there are various advantages and disadvantages associated with a balance sheet.

Advantages

• Supports the decision-making process regarding investment and resource allocation.
• Helps assess liquidity and analyze the company’s ability to meet its obligations.
• Establishes transparency and ensures appropriate accountability to stakeholders and regulatory bodies.

Disadvantages

• Applying paint and wallpaper to the walls
• Replacing a damaged appliance with a new appliance
• Fixing the minor electrical faults
• Replacing the cabinet hardware
• Replacing the faucets & showerhead

Income Statement vs Balance Sheet: Find Out the Difference

Having defined both terms, we now turn to the core of our topic. Differences between the income statement and the balance sheet arise from several factors, including purpose, the elements they present, and their temporal scope.

However, the major difference is that the income statement focuses on the company’s fiscal performance, whereas the balance sheet focuses on its fiscal position.

An income statement presents the inflows and outflows of cash for the business. On the other hand, the balance sheet comprises details of the company’s assets, liabilities & equity. It refers to your business’s current economic position.

Moreover, if we focus on the balance sheet vs the income statement, they differ from a compliance & reporting perspective. An income statement is useful for tax and financial reporting & also to ensure compliance with accounting standards like IFRS or GAAP. On the other hand, the balance sheet is more useful to track loan covenants and other financial ratios.

Here is the tabular structure showing the income statement and balance sheet differences:

Closing Lines

We conclude our discussion of the income statement vs the balance sheet. To get insight into the complete financial overview of your company, always consider both statements. Relying solely on a single statement will never lead to correct budgeting and forecasting, or even decision-making.

Hope you had a productive review of your knowledge while having the balance sheet and income statement example. Also, digitalizing your business finances is another important focus.

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