June 11, 2022
The Balance Sheet and Income Statement are important financial documents to business owners everywhere. When a company has a strong Income Statement it will usually have a good Balance Sheet.
These documents work together to help a company understand its Financial Position, they have a few differences:
Each of these documents serve a different purpose within a company's Finance Department. The individual purposes combine to provide a comprehensive look at the company's overall financial health through the final Financial Statement. Income Statements, for example, determine how much Profit a company is making or losing at a certain point in time.
See below an Income Statement example imported to Google Sheets automatically with LiveFlow:
Balance Sheets, however, show a company's Financial Position regarding how many Assets they have as opposed to Liabilities. Cash Flow shows how much cash overall goes in and out of a company. Both Income Statements and Balance Sheets provide information for the Cash Flow Statement.
These documents measure similar areas of a company's Finances, but there are slight differences between each that allow the organization to get a full Financial Report when looking at all three. Income Statements measure a company's Revenue and Expenses from one point in time to another. Companies subtract Expenses from Revenue to determine the Profit if the answer is Positive or Loss if the answer is Negative. A Balance Sheet measures the Liabilities and Shareholders' equity. The company adds the Liabilities, which are negative, to the equity to determine the Assets. Positive Assets mean the company is in good standing.
Cash Flow differs even more from the other two statements as it measures all Cash-related movements to determine how much money goes into Operating, Financing and Investing. This Statement doesn't show a company's Financial Health as much as give the company ideas about where their money is going and how they can budget differently.
Cash Flow Statement:
Financial Statements are compiled in a specific order because information from one Statement carries over to the next Statement.
The Trial Balance is the first step in the process, followed by the Adjusted Trial Balance, the Income Statement, the Balance Sheet, Cash Flow statement, and Statement of Owner's Equity.
An Income Statement is actually more important than a Balance Sheet, as it helps business owners decide whether they can generate Profit by increasing Revenues, by decreasing Costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a Financial period. The business owners can refer to this document to see if the strategies have paid off. Based on their analysis, they can come up with the best solutions to yield more Profit.
There are two main groups of people who use this Financial Statement: internal and external users. Internal users include company management and the board of directors, who use this information to analyze the business’s standing and make decisions in order to turn a Profit.
An Income Statement is a report that shows how much Revenue a company earned over a specific time period, Balance Sheet shows what a company owns and what it owes at a fixed point in time. Cash Flow Statement shows the exchange of money between a company and the outside world also over a period of time.
An Income Statement shows the Costs and Expenses associated with earning that Revenue it tells how much the company earned or lost over the period.
A Balance Sheet shows a snapshot of a company’s Assets, Liabilities and Shareholders’ Equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period.
So, what are three major differences between the Balance Sheet and Income Statement?
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