Income statement vs. balance sheet

Income Statement

An income statement shows your income and expenses for a certain period like a year, a quarter, a month, or a week.  The income statement provides important information about the profitability of your company.  If properly classified, it can also give you insight into your company’s revenue mix, gross profit percentage, overhead costs, return on investment on labor costs, and many other important key performance indicators.

Balance Sheet

A balance sheet is comprised of current assets (what you own), current liabilities (what you owe), and current equity (what your interest is worth).  A balance sheet is a representation of what your company is worth at any given point in time.  

Common balance sheet accounts include:

• Cash - the balance in your company bank accounts 

• Credit cards payable - credit card balances 

• Accounts receivable - what customers owe you 

• Accounts payable - what you owe vendors

• Fixed assets – the cost of computers, equipment, furniture & fixtures, and company vehicles

The balance sheet can give insight into the company’s financial health that the income statement alone cannot.  Metrics commonly measured by the balance sheet include the quick ratio (a measure of the company’s liquidity), the current ratio (a measure of the company’s ability to pay it’s short term liabilities), and debt to equity ratio (a measure of the degree to which a company is financing its operation through debt vs company/owner funds).

The bottom line

When analyzed together, the income statement and balance sheet can provide useful insight into the company’s performance, financial health, and current worth.  Together, these metrics can help management make strategic decisions regarding the company’s operations.