Balance Sheet vs Income Statement: What’s The Difference?

The cost of goods sold is a combination of the labor and materials used to produce the goods and services that your company sells to customers. These are expenses used Balance Sheet vs Income Statement directly for the production of goods and services. While there are some similarities between those two financial documents, there are also some important differences.

• The shareholders’ equity shows how much the owners of the company have invested in the company.
• A balance sheet is a financial statement that highlights what the company owes and owns at a specific time.
• The cost of goods sold is a combination of the labor and materials used to produce the goods and services that your company sells to customers.
• A company’s balance sheet depends on its unique mix of assets, liabilities and equity.

It’s possible for a firm to operate profitably without generating cash flow or to generate cash flow without producing profits. The P&L statement shows net income, meaning whether or not a company is in the red or black. The balance sheet shows how much a company is actually worth, meaning its total value. Though both of these are a little oversimplified, this is often how the P&L statement and the balance sheet tend to be interpreted by investors and lenders.

Balance Sheet vs. Income Statement

Every company’s income statement will look a little different based on their specific sources of revenue, expenses, gains and losses. This simple example should give you an idea of what to include on an income statement. With the aid of income statements, companies can closely monitor their revenue and expenses and prevent their costs from rising above their revenue. If a company’s expenses grow faster than its revenue, the company could lose its profit gains. Balance sheets and income statements are both financial statements that provide information about the company’s finances, but they are not the same.

The trial balance provides financial information at the account level, such as general ledger accounts, and is therefore more granular. Eventually, the information in the trial balance is used to prepare the financial statements for the period. Finally, both statements can be used to calculate important financial ratios, such as the debt-to-equity ratio, which is a key metric for assessing a company’s financial situation. Assets are everything that a company owns and can use to generate income. This includes cash, investments, accounts receivable, inventory, property, plant, and equipment.

How Do the Income Statement and Balance Sheet Differ?

They use the income statement to check if the company is making enough profit to meet up its financial obligations (pay its liabilities). The table below outlines some key differences between a balance sheet and income statement (also known as a profit and loss statement). From an accounting standpoint, revenues and expenses are listed on the P&L statement when they are incurred, not when the money flows in or out. One beneficial aspect of the https://www.bookstime.com/articles/pro-forma-financial-statements P&L statement in particular is that it uses operating and nonoperating revenues and expenses, as defined by the Internal Revenue Service (IRS) and GAAP. The income before tax is the total operating income plus any other income earned that is not directly related to your company’s operations, less any other expenses. Your net income is generally referred to as income before tax and determines how much tax you will pay for the reporting period.

When making the balance sheet vs. income statement comparison, the most important thing to know is that those are two of the most critical business documents. They provide essential information about a company’s performance and the value of the business. While both statements are useful, they serve different purposes and should be used in conjunction with each other to get a full picture of a company’s financial situation. There are a few key similarities between a balance sheet and an income statement. Both provide insights into the overall financial health of a business. Revenue is money earned by a company during a specific period of time, typically from the sale of goods or services.

J.C. Penney Company

A vertical analysis involves creating ratios and percentages for each line item in a financial statement using a baseline item. The ratios calculated in a vertical analysis allow FP&A analysts to compare a company’s performance across different periods and the performance of various companies in the same period. The balance sheet and the income statement may have differences, but they can be jointly used to analyze the overall health of a company. One way to analyze a company’s performance is by carrying out a vertical analysis on the balance sheet and the income statement.

The statement categorizes each of the company’s revenues within the period and each of the company’s expenses, with the difference between these two numbers representing profit (or loss). As mentioned earlier, the financial statements are linked by certain elements and thus must be prepared in a certain order. The income statement was first since net income (or loss) is a required figure in preparing the balance sheet. During the period close process, all temporary accounts are closed to the income summary account, which is then closed to retained earnings.