Balance Sheet vs. Income Statement

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Two of the most significant documents when it comes to assessing a company financially are the balance sheet and the income statement. While they both show important financial information there are key differences that are important to understand when it comes to reviewing a balance sheet vs. an income statement.

Balance Sheet

A balance sheet is a snapshot of a company’s financial position at a certain point in time and summarizes its assets, liabilities, and equity.

The total assets of the company will always equal their liabilities plus their equity, reflecting the fact that any asset or value in the company is created through some form of debt or capital invested in the business.

Publicly listed companies are required to publish their balance sheet annually at the very least and quarterly in many cases. They are also required to show comparative figures from the prior year or prior quarter so that a user can see how their financial position has been changing. Internally companies will, however, often prepare a balance sheet on a monthly basis for management reporting purposes. A key link between the balance sheet and the income statement is that the income statement for a given year will reconcile the balance sheet from the beginning of the year to that at the end of the year. If it doesn’t, then there is an error somewhere in the accounting.

Income Statement

An income statement (also known as a profit & loss statement, or P&L) is a summary of a company’s financial performance over a period of time and summarizes the revenues and expenses over that period. The total revenues less the expenses will then generate the earnings (or loss) for the period and then impact the retained earnings in the equity section of the balance sheet. So while a balance sheet shows a financial position at a point in time, the income statement covers the financial activity over a certain period.

Similar to the balance sheet publicly listed companies are required to regularly publish their financial statements and provide comparative figures from prior periods. Internally companies also use income statements more regularly, sometimes even reviewing results weekly.

Balance Sheet vs. Income Statement

So while the balance sheet is a fixed snapshot of a company’s financial position the income statement shows the performance over a period that led to the results in that snapshot. Any proper financial analysis of a company will require a review of both their balance sheets and income statements, as alone neither is incredibly useful. For example:

• A company could have a bad income statement, showing losses, but the assets and equity of the balance sheet are so strong that the loss is not an immediate concern. So even with a poor income statement, there is still value in the company.
• Alternatively, a company could have strong earnings on the income statement, but when compared to the debts of the company the earnings are relatively insignificant. So even with a good income statement, there is a concern in terms of the company’s ability to continue.

As the examples above demonstrate, reviewing both the balance sheet and the income statement are important in order to get a full financial picture of a company. While some analysts weigh more heavily on one of the balance sheet vs. the income statement a balanced approach is really required in any analysis.

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