Understanding the Difference Between Balance Sheets and Income Statements

Professional bookkeeping businesses produce income statements and balance sheets for their clients. These reports are excellent tools for owners of businesses, but are often confused.

A balance sheet gives a snapshot of financial situation at a moment in time, while an income statement – or profit and loss statement – measures financial position changes over a month or quarter.

The two supplement each other, and both are used by business owners, investors and people lending money.

The Balance Sheet

The balance sheet is the basis of a company’s financial statements.

It includes

1. the company’s assets
2. the company’s liabilities and
3. the owner’s equity–money invested at the opening of the business, along with retained earnings which can be attributed to owner(s) or shareholders.

The statement has two columns (assets in one, equal to the owner’s equity and liabilitites in the second), based on this equation:

Liabilities + Shareholder’s Equity = Assets

The balance sheet shows the company’s financial changes since it was founded, with every transaction, monies raised, debts built up, assets obtained (with their present values) in one statement.

It gives a comprehensive view of the operations, finances and outlook for the company.

The Income (P&L) Statement

The income statement summarizes the fiscal performance of a company, reporting

• income,
• COGS,
• overhead and
• net profit

Revenue: This is income from normal business operations. It is the top line of the company, and represents the total revenue earned during a particular period of time.

Income is divided into operating revenue (revenue generated from core activities) and non-operating revenue (non-core sources such as interest income and rental income).

Other Income and Expenses: These one-time increases come from the sale or disposal of assets. They may be comprised of sales of property, minority holdings in different companies, or subsidiaries.

A sale or disposal at a loss often results assets selling for below balance sheet valuation during the period.

Expenses: This includes all the outlays of doing business, such as the money spent on labor and materials during the production of goods and services (cost of goods sold).

This category also include expenses which are essential, but not directly linked to production, like general administrative costs, and asset depreciation or amortization based on fixed or usage timetables.

Net income/loss: The P&L concludes in the net profit or loss during the time measured: the bottom line. The net is what is left after realized gains are added and expenses and realized losses are taken away. This is the figure reported to shareholders.

The P&L statement allows the company to take action against changes from projections. Others, such as potential lenders or investors, pay attention to it as well, especially when contrasting periods to forecast long-term company trajectory.

To an expert, the data in a P&L statement can lead to important insights using these ratios:

1. the gross and operating margin ratio
2. the price-earnings and return-of-equity
3. the times-interest-earned (TIE) ratio

Balance sheets and income statements are two of the reports Cincinnati bookkeeping firms like BookWerks^TM provide regularly to clients. Because everything is in the cloud, clients can see where they stand financially at any time with us.

BookWerks^TM can help you understand how to best use your balance sheet and income statement to make key business adjustments and decisions.