In 2022, there are about 33.2 million small businesses in the US.
If you are an entrepreneur or are currently working towards becoming one, you must understand the basic accounting principles. Since you will be responsible for reporting your income and expenses, it would be advantageous to understand how a business’ income statement and balance sheet function.
All you need to do is break them down to understand both of these. So read on, as we will review the income statement vs balance sheet differences in this article.
Timing
The main difference in timing is that income statements are prepared periodically, while balance sheets are prepared by a certain date.
Income statements can be prepared monthly, quarterly, or yearly, while balance sheets are always prepared by a certain date. It means that income statements show results over some time, while balance sheets show a snapshot of the business at a specific point in time.
Performance
Businesses can use the income statement to evaluate a company’s financial performance. It shows how much money a company is making (or losing) over a specific period.
On the other hand, businesses can use the balance sheet to evaluate a company’s financial position. It will show how much a company is worth (assets) versus how much it owes (liabilities).
These records must be accurate as they can help us determine the performance of our business. Many sources online offer income statement and balance sheet guides to businesses that need them. They can help us with things like finding a balance sheet error and how to fix them.
Reporting
The income statement reports a business’s revenues and expenses over a specific period, typically over a year. On the other hand, the balance sheet reports a business’s assets, liabilities, and equity at a specific point in time.
The income statement also separates operating and non-operating items. The balance sheet lumps them together.
Furthermore, the income statement calculates a business’s net income, while the balance sheet is not. Net income is a key metric for evaluating a business’s financial health.
Creditworthiness
When a person applies for credit, lenders often request an income statement and a balance sheet. Though both document a person’s financial picture, they serve different purposes.
An income statement, also called a profit and loss statement, shows a person’s revenue and expenses over a certain period, typically a year. This statement can show a lender whether the borrower is likely to be able to repay a loan.
On the other hand, a balance sheet lists a person’s assets and liabilities as of a specific date. This statement can help a lender assess a borrower’s riskiness as an investment.
Understanding the Difference Between Income Statement vs Balance Sheet
There are several key differences between an income statement vs balance sheet. An income statement shows a company’s revenue and expenses over time, while a balance sheet shows a company’s assets, liabilities, and equity at a single point.
You can use income statements to assess a company’s financial performance, while you can use balance sheets to assess a company’s financial health. If you’re trying to understand a company’s financial situation, reviewing both an income statement and a balance sheet is important.
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