FAQ

Balance sheet and income statement are part of the financial statements of a company for the perusal of all the stakeholders. Though both, income statement and balance sheet, have similarities as well as differences, they are used side by side by those who are desirous of understanding the financial health of the company for investment purposes. Many feel that they are same but this article will highlight the differences between these two financial statements to remove these doubts.

Also referred to as a statement of financial position, balance sheet shows the current financial position of the company and is an integral part of the financial statements. It includes all the assets and liabilities of a company in a sequential order which means that the most liquid assets are listed first and the most pressing liabilities are first before smaller ones. It is also a sheet of papers that reflects the solvency of a company. The three most important elements of a balance sheet thus are assets, liabilities and equity.

Assets are financial resources a company has as a result of its past transactions. These assets translate into cash flow into the company that can be used for business purposes. Some examples of assets are cash, plant and machinery, furniture, marketable securities, patents, copyrights and account receivables.

Liabilities are the opposite of assets and are obligations of the company that eventually result in a cash outflow. Some examples of liabilities are notes and bonds payable, income tax, interest payable to lenders, dividends payable and warranty liability.

Equity is that part of the assets that are claimed by the owner. It is the net result of assets after all liabilities have been met. Examples of equity are capital, ordinary and preference share capital, appropriated and inappropriate retained earnings etc.

Also called the profit and loss statement or comprehensive income statement is a financial statement that reflects the overall performance of a company during a specified period of time. It contains all profits and losses of the company to come up with net profit or loss. Two major components of any income statement are the income and the expense of the company.

Income is defined as increase of economic benefits in a given period of time in the form of inflow of assets or a decrease in liability. All revenues and gains are classified in the income head of a income statement.

Expense, on the other hand are a decrease in economic benefits in the form of cash outflow or an increase in the liabilities of the company. Some examples of expenses are cost of sales, sale promotion, advertising expenses, income tax expense, stationary and potage expense etc.

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