Balance sheet vs income statement

Accounting for the differences

· reporting,finance

As a small business owner or just someone who occasionally looks at financial statements, it can be daunting to connect the dots between the balance sheet and income statement. But these two tools have much more in common than you might expect. 

But what exactly are the differences and similarities, and how do these two reports interact with one another? That's what we hope explain through this in-depth article. 

Let's get started.

What is a Balance Sheet?

The balance sheet is a statement of assets (goods that your company owns) and liabilities (debts that your company owes), as well as shareholder’s equity (what the owners have invested). It is a snapshot in time of all these accounts, typically taken at the end of a monthly, quarterly or annual period. The purpose of the balance sheet is to show a company’s net worth at that point in time. 

3AG Finance Insights balance sheet

To keep a sense of order, the asset side of the balance sheet must match the liabilities and shareholder’s equity. That is to say, the sum of all entries for what you own must match what you owe. This approach is intuitive when looking at items like inventory (an asset) and short-term debt (a liability), but can become confusing when looking at more obscure entries designed to balance both sides, such as goodwill (an intangible asset).

Balance Sheet Assets

Assets are grouped based on their ease of liquidity in the following order:

  1. Current Assets
  2. Investments
  3. Property, Plant and Equipment
  4. Intangible Assets

Current assets consist of items that could be turned into cash the fastest, including cash (duh), short-term investments (bonds, GICs, etc.), accounts receivable (money owed by but not yet received from your customers), inventory, supplies, prepaid expenses and other miscellaneous items. 

Investments are mid- to long-term vehicles for parking surplus cash, such as stocks. 

Property, Plant and Equipment is exactly as it sounds, including accounts like land, land improvement, buildings, and equipment. Since equipment generally wears down over time, there is a field for depreciation to account for the decline in value. Depreciation is typically calculated based on formulas from government tax services, as it is an expense that reduces overall net income. We see here our first example of how the balance sheet is closely integrated with the (soon to be explained) income statement.