Figuring out finances? You’ll need to keep balance sheet reports and create income statements. Read on to find out what to include and the difference between the two.
When running a business, your finances are sink or swim. The two key strokes to learn when it comes to bookkeeping are the balance sheet and the income statement. They are both financial documents, so what’s the difference?
Keep reading to find out more about:
Establishing your knowledge on these reports will help determine what the similarities and key differences are and better equip you to create your own.
When running a business, it is important to keep detailed records of all things finance. A balance sheet is a financial statement that will contribute to that. A balance sheet is a document that records total assets, total liabilities, and equities of a business. Think of it as a snapshot of the state of your financial position at any specific time.
A company’s assets are parts of your small business with liquid value. This means anything of value that can be easily converted to cash. There are a few different types of assets, so read on to find out more.
Assets can be divided into two categories: current and non-current or long-term.
Current assets mainly include:
Non-current or long-term assets mainly include:
Liabilities are any debts or obligations a business owes to creditors or lenders. This means that if you have borrowed money, space, or equipment, it is considered a liability.
Similar to assets, there is more than one kind of liability: current and non-current or long-term.
Current liabilities include:
Non-current or long-term liabilities include:
Many small businesses start out by receiving funding from a shareholder. The incentive for a shareholder to invest in a company is to see a return on investment. On your company’s balance sheet, you will need to keep track of shareholder equity, as it matters to your finances, as well as to the shareholder.
You will also need to account for the owner’s equity, which is how much the owner has invested into the business.
When adding shareholder equity to a balance sheet, there are two ways to keep track of the financing:
An income statement is a financial report that focuses on a specific point in time to detail a business’s earnings. A balance sheet is a key document when it comes to income statements.
Keeping a balance sheet up-to-date will provide more efficient and accurate income statements. In addition to that, if you are ever looking for an investor or partner for your business, they will undoubtedly request an income statement to help them make their decision based on your company’s performance and your company’s profitability.
Income statements will include four key aspects to detail the financial workings of your business.
If you’ve ever heard the expression, “You have to spend money to make money,” then you’ve heard of expenses. Expenses are the overall costs a business requires to continue its operations and produce revenue.
For example, if you own a bakery, you likely need flour, milk, and eggs to create your baked goods. Flour, milk, and eggs would be considered expenses because you have to spend money on them, but your business cannot operate without those materials.
Expenses can be separated into two categories: primary and secondary.
Net income is the amount of income you walk away with after all other expenses have been accounted for. This is often referred to as “the bottom line.” Note: this is not the same as gross income, as gross income does not include expenses in its calculation.
Luckily, there is a relatively simple equation to determine your net income. Your net income is equivalent to your company’s revenue and gains minus your expenses and losses.
To calculate your net loss, look at your total revenue and subtract your total expenses.
In general, a gain is the term for the cost of an investment rising above the original amount. Opposite of that, a loss is the term for the cost of an investment falling below the original amount.
A gain or loss becomes “realized” when an investor decides to sell their asset. A realized gain occurs when the investor is able to cash in on their investment when they sell their asset. A realized loss occurs when the investor sells their asset for less than they originally invested.
While revenue does have to do with income, there is a difference between the two:
When creating an income statement, you must make the distinction between the two reports.
Balance sheets and income statements are both important documentation for your business. It is vital to keep track of your financial performance, so you are always aware of where your business stands.
The biggest difference between the two is what is detailed on each report.
Remember, balance sheets include:
While income statements include:
When you look at those elements close together, it is easier to highlight the differences between the two.
Balance sheets are a snapshot of the current finances of a business at that specific period of time. Income statements focus on the financial activity of a business, like a net profit and loss statement, over a longer time period.
Balance sheets and income statements are similar because they are both key financial reports.
Running a small business is a huge undertaking. One of the most helpful practices business owners can adopt is staying organized. Balance sheets and income statements are necessities when it comes to financial health and overall organization.
Source:
How to Read & Understand an Income Statement | Harvard Business School
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