Balance sheet and income statement: everything you need to know
Balance sheet and income statement: everything you need to know
It is often said that accounting is the “lifeblood” of the modern business world. With good accounting practices, companies will be able to identify their financial status, ensure that they maintain a good reputation among all relevant parties, and can make better financial decisions. Inevitably, the generation and use of financial statements has become one of the most important parts of the accounting process.
For small and large companies, financial reporting has several important purposes. These reports will be used regularly to assess the company’s situation and plan the best path forward. They will also receive the attention of many interested parties, including tax authorities and regulatory agencies, potential investors, and even competitors. Since financial reports are used internally and externally, they are strictly regulated by FINRA, SEC and other related agencies.
There are many different types of financial statements. The five most common types of financial statements are balance sheet, income statement, cash flow statement, statement of changes in equity, and statement of financial position.But that Balance sheet and Proof of income Usually considered to be the most important, this will be discussed below.
In this article, we will compare the balance sheet and the income statement and discuss why these two financial statements are so important. We will also discuss how decision makers at all levels use this information to help achieve their financial goals.
What is a balance sheet?
One Balance sheet It is a “snapshot” that reports what the company owes and owns at a specific point in time. The balance sheet represents information related to a specific date, such as December 31, 2020. There are three types of balance sheet reports: assets, liabilities, and shareholders’ equity.
For the balance sheet, it is essential that the value of the assets column equals the sum of the liabilities and shareholders’ equity columns. This means that the balance sheet is sound, at least in the accounting sense. The assets column represents everything the company currently owns, including tangible property, cash, equipment, trademarks, and many other things.The debt column represents everything about the company owe, This can include long-term and short-term debt.
The shareholder equity column represents everything else. The “balance sheet value” of a company is determined by how much larger the assets column is than the liabilities column. This simple equation is often referred to as the “value” of the company. Balance sheets change every day, and for large companies, they almost always change.
What is the income statement?
One Proof of income It is a financial statement that shows how much revenue the company can generate in a certain period of time. The report classifies the company’s current income and company’s expenses. The difference between these two figures represents the profit (or loss).
Normally, the income statement will represent events that occurred during the year, but this may vary from case to case. The income statement can also be titled “Income and Expenses from January 1, 2020 to December 31, 2020”, or something similar. Companies can also use quarterly, monthly or even weekly income statements to examine their financial performance more closely.
By looking at the income statement, you can easily determine whether a company is profitable in a certain period of time.If total revenue is greater than total expenditure, it means that the company used to be profitable.If the total revenue is less than the total expenditure, it means that the business is no profitable. Some businesses can afford (or are even designed to) not generate profits for a period of time, but in any case, all business owners must accurately understand their position.
Balance sheet and income statement
Obviously, balance sheets and income statements as well as other financial statements (such as cash flow statements) are very useful. However, to know whether you should use a balance sheet or an income statement, it is important to determine the structural differences between the two.
- Time and structure: Although the balance sheet clearly identifies what the company owns and owes at a single point in time, the income statement shows the company’s income and expenditure during a certain period of time.
- Do and own: The balance sheet shows what the company has, but only the income statement can really tell the company’s performance.
- Typical usage: The company will use the balance sheet to determine whether it has the resources (such as cash) to meet all of its financial obligations. On the other hand, the income statement is used to assess whether the business is profitable and to determine what changes may need to be made.
- Revenue recognition: Although on the balance sheet, “accounts receivable” can be regarded as an asset, the income statement will not recognize the income until the income is actually received.
- creditor: Lending institutions and creditors usually care more about the balance sheet because the company’s assets can be used as leverage in the event of problems. However, having an income statement showing that your business is already profitable will definitely help.
In the end, there is no way to bypass it: these two financial statements are critical to decision makers at all levels.
Balance your book
For those who want to know how to create a balance sheet or how to create an income statement, it is important to realize that these two financial statements are often work together. We will illustrate with the following examples:
- A company decided to buy a new computer with cash. On the income statement, the cost of the computer will be added to the “Expenses” column and may be marked as “Equipment”. In the assets column of the balance sheet, cash will be subtracted and then added back as “equipment”.
- A company sells 10% of its inventory. On the income statement, the value of the inventory will be added to the “income” column, thereby increasing the company’s net profit. On the balance sheet, subtract the value of the inventory from the “inventory” row on the asset side and add it again as cash.
Whether you plan to manage the books on your own or hire an accountant, it’s important to understand how your income statement and balance sheet affect each other. Every time your business conducts a financial transaction, your current balance sheet and future income statement may change.
To master these financial statements, you need to learn how to determine what is income, what is expense, and what is liability, asset or shareholder equity. As long as you can account for all financial activities and keep your books balanced through double-sided accounting, your business can use these financial reports to bring you benefits.
In the end, you can learn a lot from the income statement and balance sheet. The balance sheet provides a timely snapshot of all your company currently owns (assets and equity) and debts (liabilities). On the other hand, the income statement records your income and expenses (and net profit) during a certain period of time. Use these two financial statements to assess your current situation and make strategic choices for the future.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material is for reference only and is not intended to be provided and should not be used as a basis for tax, legal or accounting advice. Before conducting any transaction, you should consult your tax, legal and accounting advisors.