Balance Sheet VS Income Statement: What’s the Difference?Download Now: FREE GST 2023 GuidebookDownload Now: FREE Employment Pass ChecklistDownload Now: Free Incorporation Checklist
Balance sheets and income statements are valuable tools to gauge your business's performance and prospects. The balance sheet and income statement complement each other in providing a complete picture of a company’s financial position. Both are crucial for decision-making, investors/partners and financial institutions. In this article, we’re going to break down what each term means and the information they contain, as well as the difference between these two terms.
What is a Balance Sheet?
The balance sheet summarises the financial position of a company at a specific point in time. It helps assess financial health using ratios such as current ratio, debt-to-equity ratio, and return on shareholder’s equity. Investors and lenders use it to determine creditworthiness and availability of assets for collateral.
What is Included in a Balance Sheet?
It includes assets, liabilities and shareholder’s equity, further categorised to provide accurate information. Here is a more detailed explanation of what each of these entails:
- Cash and cash equivalents: Listed under current assets, this term may include marketable securities and short-term deposits
- Accounts receivable: Listed under current assets, this is debt owed to a company for goods and services delivered, but not yet paid for
- Inventory: Listed under current assets, this refers to finished goods ready for sale, along with raw materials intended for the production of goods or services
- Plant, property, intellectual property and more: Listed under non-current assets, these are long-term investments that cannot be turned into cash quickly, aren’t directly used in the production process, and have a life of more than a year
- Debt: Listed under either current liabilities or non-current liabilities (depending on whether the debt is long-term or short-term), debts are any sums of money owed to lenders, banks or suppliers
- Accounts payable: Listed under current liabilities, this is the company’s outstanding payments owed to suppliers or vendors for goods and services delivered
- Underfunded pension plan: Often listed as a non-current liability, company-sponsored retirement plans with more liabilities than assets are considered underfunded plans, unable to meet their current or future obligations. The company is obligated to pay and fill the gaps as and when the need arises
- Deferred tax liability: This represents taxes that are accrued, but not yet paid
Owner’s or Shareholder’s Equity:
This is equal to the total assets attributable to owners or shareholders in the event of the company’s liquidation, after paying all debts or liabilities.
This segment of the balance sheet includes Return of Equity (ROE), which is calculated by dividing net income by shareholder’s equity. ROE measures management’s effectiveness in driving returns based on equity.
What is an Income Statement?
Also known as the profit and loss (P&L) statement, the income statement summarises the financial performance of a business during a specific period. Management, investors, shareholders, and others use it to assess the performance and future prospects of a business.
What is Included in an Income Statement?
It includes revenues, expenses, and gains and losses recognised from the sale or disposal of assets. Here is a more detailed explanation of what each of these entails:
- Revenue: This includes money generated from normal business operations. It is further divided into operating revenue, or revenue generated from the core activities of a business, and non-operating revenue, which includes non-core sources such as interest income and rental earnings
- Realised gains and losses: Gains, also referred to as “other income,” these are one-time, non-recurring gains that arise from the sale or disposal of assets. On the other hand, a loss-making sale or disposal of assets is listed under “other expenses,” and is often a result of assets selling for prices lower than their valuations on the balance sheet during the specified period
- Expenses: This includes all business expenses, such as the cost of goods sold (COGS) and general administrative costs
- Net income/loss: The income statement culminates in the net profit or loss during the period
What’s the Difference Between a Balance Sheet and an Income Statement?
The balance sheet and income statement represent important information regarding the financial performance and health of a business. An income statement assesses the profit or loss of a business over a period of time, whereas a balance sheet shows the financial position of the business at a specific point in time.
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