Let’s examine the nitty-gritty of each below!
The Balance Sheet
The balance sheet is a financial statement that shows you the big picture. It includes business assets (what you own), liabilities (what you owe), and equity (what is left over) during a specific accounting period. As a rule: your assets must equal the sum of liabilities and equity. Your liabilities reflect how you finance your assets, while the equity comes from subtracting liabilities from your assets.
When you are looking to increase capital, your prospective investors or loan creditors will analyze the company’s balance sheet to determine how well your team utilizes resources. This document exhibits your company’s net worth at a given period, so it gives your stakeholders a thorough insight. Follow best practices and update your balance sheet every month so that you can keep everything “in balance!”
The Income Statement
As the name implies, this reports your income. Others call this profit and loss statement because it documents revenues, costs of goods sold, and expenses over a period. Simply put, this shows how much you made and how much you spent over a particular time. Closely monitoring your company’s revenue and expenses equates to better cash flow management. The goal is to keep costs down while working to increase sales/ revenues. Failure to do so means losing profits. Examining trends in your income statement will help you assess how to improve cash flow and boost profit margins.
Your company’s income statement also indicates your team’s efficiency. It also makes it easier for you to compare your performance with your industry competitors. Such statement has a significant influence on your marketing strategies and expansion plans. This statement also matters to potential investors because it reflects your business’s financial health. No one wants to infuse capital when the losses are significant.
The Primary Differences
Though these two documents provide financial information regarding your business, they do have glaring differences. You must know what these are so you can keep track of all your transactions with careful consideration and great detail. Let’s take a look at the nuances below:
Time component: The balance sheet exhibits what you own and what you owe at a specific moment in time. In contrast, the income statement shows the summation of your revenues and expenses for a period.
Performance: Do note that your balance sheet will never show your company’s performance. They just state the figures. You have your income statement to elucidate whether you are performing well or poorly. expenses for a period.
Documentation: Your balance sheet records all your company’s assets, liabilities, and equity. On the other hand, the income statements document revenues and expenses.
Utilization: You utilize your balance sheet to evaluate if your business has sufficient assets to address all your financial debts or obligations. On the other hand, your income statement will help you analyze if you are company is earning well so you can check for issues that require correction.
Final Wrap Up
Despite their differences, both the balance sheet and income statement provide crucial financial information. This pair complements each other to show you how well your business is performing. You need both to evaluate your company’s overall financial position. Creditors and investors also use both to gauge your business’s prospects and creditworthiness.
Do take note that these two financial statements are only useful if you regularly input accurate information. You need to be updated with your bookkeeping and accounting to make both your balance sheet and income statement effective.
If you need help setting them up, give us a call. We’d be happy to provide you with a free 30-minute consultation to show you how to get things done.
