Income Statement vs. Balance Sheet: What's the Difference?

Income Statement vs. Balance Sheet
7
min read
August 9, 2022

As a small business owner, you’ll probably wonder at some point (if not every day!) whether you’re turning a profit or have enough money to pay your bills.

That information can come in handy when making important decisions, like whether to hire more employees, upgrade your equipment or take out a loan. But how, exactly, do you know if your business is doing well, so to speak? 

Some tools at your disposal are financial statements. In particular, your income statement and balance sheet are incredibly helpful in figuring out whether you’re in the black or the red. Both statements provide financial information, but they do so differently. Let’s take a closer look.

Income Statement vs. Balance Sheet

An income statement (a.k.a. profit and loss statement) tells you if you’re making a profit or not, while a balance sheet tells you whether you have enough assets to pay your bills and debt. The balance sheet also shows you how much is left over to distribute to owners and shareholders or to put back into the company (all of this is also known as your equity). 

Another major difference?

The income statement looks at performance over a given time period (typically a quarter or fiscal year), while the balance sheet gives you a snapshot of your financial health at a specific time.

What Goes on the Income Statement?

Your income statement is a quick way to figure out if you’re making a profit. Here's a template if you're looking to make one. (Just click on "Make a copy" to get started).

The main components of an income statement are revenue and expenses. It starts with your total revenue and then subtracts different expenses to calculate the following types of income: gross, operating, pre-tax, and net. 

The income statement shows a list of total expenses for a given period and usually has more than just one expense.

At the end of the income statement, you’ll have your net profit or loss amount, which tells you how much money you made after paying for all expenses. This number is also known as the bottom line since it’s at the bottom of the income statement. 

Sample Profit & Loss Statement for Art’s Paint Supplies

Let’s take a closer look at the lines on the income statement and how you use them to calculate your bottom line.

What Goes on the Balance Sheet? 

While your income statement shows you your total profit or loss for a given period, your company’s balance sheet outlines your financial position on a specific day by comparing what you own (your assets) to what you owe others (liabilities). 

Here's a template you can use for your business. (Just click on "Make a copy" to get started.)

Screenshot of a balance sheet

There are three sections on the balance sheet: assets, liabilities, and equity. Here’s what’s included in each area.

Assets

Assets refer to anything your business owns that has monetary value, such as cash, inventory, and even patents and copyrights. 

On the balance sheet, you’ll usually find assets divided into separate categories, including:

Liabilities

The liabilities section represents the money you owe others, such as your vendors, suppliers, and lenders. 

Similar to the assets section, your liabilities section will be separated into a couple of different sections, including:

Equity

The final section on the balance sheet contains money held as equity in the business. Equity is the amount leftover for the owner (or shareholders) after all expenses are paid off. In other words, equity is total assets minus total liabilities.

Types of equity include: 

If you’re the sole owner of a business, this is the owner’s equity. 

Key Differences Between Income Statement and Balance Sheet

Ultimately, the income statement and the balance sheet provide different methods for assessing your company’s financials. 

Here are the key differences between these two financial reports:

Timing

When you look at an income statement, you’re looking at your financial data over a period of time, such as a month, quarter, or year. In contrast, a balance sheet only looks at your financial position at a single point in time, such as year-end.

Metrics Reported

Your income statement and balance sheet have different financial metrics on them. Your income statement includes your revenue and expenses, while your balance sheet shows your company's assets, liabilities and equity. 

You usually create the income statement first since it provides the information you need for the balance sheet. In particular, if your company makes a profit and doesn’t take any of that money out through an owner’s draw or dividend payments, the profit goes into the owner’s or shareholder’s equity section on the balance sheet.

Financial Performance

Since the income statement looks at your finances over time, you can use it for analyzing financial performance. 

You can use the income statement to answer questions like: 

The balance sheet doesn’t tell you about your company’s performance over time. Instead, it looks at everything you own and owe and answers questions like: 

While it’s crucial to answer these questions for yourself, you’re not the only one asking them. 

Investors will want to know about a company's profitability and assets vs. liabilities before giving money to you. Banks will want your balance sheet to see if you have enough assets to take on new debt. 

What an Income Statement and Balance Sheet Have in Common

The income statement and balance sheet do share some commonalities. Let’s take a look at what the two have in common.

Is the Income Statement or Balance Sheet More Important?

Both the income statement and balance sheet are important. An income statement tells you how profitable you are, and a balance sheet tells you how much money (and other assets) you have to pay your bills, debt, owners and shareholders.

It can take a while to turn a profit initially, and you may even need to take out loans to get your new business off the ground. But your ultimate goal is to generate a profit and have more assets than liabilities. 

And now that you understand how both of these financial statements can tell you if your business is on track–all that’s left to do? Start crunching those numbers!

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.