Balance Sheets Vs. Income Statements in Accounting

The balance sheet and the income statement are two of the four basic accounting documents that every public company must make available. Along with the cash flow statement and the owner's equity statement, they provide detailed information about a company's resources and what it does with those resources. Though they're produced together and closely related, the balance sheet and income statement differ in purpose, time frame and format.

Purpose

The balance sheet may be best described as a catalog: It identifies what a company owns (its assets), what the company owes (its liabilities), and what the company is worth (its stockholders' equity) if you subtract the liabilities from the assets. The income statement, on the other hand, essentially summarizes how the company used the items on its balance sheet to make money -- or lose money. It tracks the flow of money into and out of the company and summarizes whether the company made a profit or suffered a loss.

Time Frame

A balance sheet is a snapshot. It describes the financial condition of the company at a specific point in time. The formal name that some companies use for their balance sheet -- "statement of financial position" -- reflects this point-in-time nature. The income statement, meanwhile, summarizes financial activity conducted over a period of time -- specifically, the time since the last balance sheet was prepared. For example, a company's second-quarter financial report might have a balance sheet that describes the company's holdings as of June 30 and an income statement that summarizes all activity from April 1 to June 30.

Balance Sheet Format

By definition, a balance sheet must balance: The total value of all assets must equal the combined total value of all liabilities and owner's equity. The balance sheet categorizes assets as either current or long term. Current assets are those that can be or will be converted to cash within a year, such as accounts receivable, inventory and cash itself. Long-term assets are those that would take longer than a year to convert to cash, or that the company doesn't plan to convert, including property, equipment and investments in other companies. Liabilities, too, are categorized as either current or long term. Current liabilities are those that will come due within a year, such as accounts payable, wages due to employees and short-term borrowing. Long-term liabilities are those that will come due more than a year in the future, such as payments on corporate bonds, leases and long-term loans. Stockholder's equity has two parts: contributed capital, which is money the company got by selling stock, and earned capital, which is its accumulated profits.

Income Statement Format

A typical income statement lists revenue and expenses. Revenue is the money that comes in from business operations, and expenses are its costs of doing business. The difference between the two is the company's operating profit or operating loss, which tells you how successful or unsuccessful the company is at its business. The income statement then deducts non-operating costs such as interest payments and taxes to arrive at net income, also called earnings or profit. If net income is negative, it's a net loss. The income statement usually also provides the company's earnings per share. This figure, calculated by dividing the net income by the number of shares of stock the company has issued to the public, lets shareholders how much of a return they receive for investing in the company.

References

• University of Northern Iowa/John Pappajohn Entrepreneurial Center: Balance Sheet Basics
• Securities and Exchange Commission; Beginners' Guide to Financial Statements; February 2007
• "Financial Accounting for MBAs," Fourth Edition; Peter Easton, et al; 2010