Both are used together to monitor a business’s finances and make appropriate spending and investing decisions, but there are some key differences. Learn more about those below.
What’s the Difference Between Balance Sheets and Income Statements?
The table below outlines some key differences between a balance sheet and income statement (also known as a profit and loss statement).
Bookkeeping
On a balance sheet, a bookkeeper or business owner records the value (calculated worth) of a business at a particular time. Since it includes assets, liabilities, and investments, a balance sheet can offer an overview of what the business is worth at a specific date. Income statements, on the other hand, provide a record of the profits and losses of a business during a fixed period such as a month. This is often used by investors to see if the company is profitable or needs more funding.
Purpose
Balance sheets are used to analyze the current financial position of a business. It answers questions such as whether the company has enough assets to pay off the liabilities. Income statements are used to track the ongoing finances of the business and analyze profits, losses, and other outcomes of past investment decisions. For instance, if you apply for a business loan, you typically have to submit financial statements including a balance sheet and income statement. Investors may also check these documents to make future spending decisions.
Using Both Statements To Assess and Improve Your Business
Using a balance sheet and an income statement together can offer much insight into the operations and finances of running your business. Here are some key things you need to look out for to assess and improve on.
Losses and Liabilities
When analyzing your balance sheet, look at the biggest liabilities; when analyzing your income statement, focus on the major losses. What’s draining the most money? What are some ways you can cut your losses or reduce the liabilities?
Profits and Assets
Focus on the profits on your income statement and the most valuable assets on your balance sheet. Take the opposite approach of what you did in the previous section. Now, analyze what’s making you the most money. What are some ways you can leverage your assets to profit even more?
Red Flags
Noticing the red flags in your financial documents early on can help minimize your losses and pivot toward profit before it’s too late. Here are some common red flags to look out for:
Rising liability-to-assets ratioRecurring lossesFrequent accounting errors (miscalculations, etc.)
Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
