Balance sheets and income statements are two important financial documents. Both of the forms provide insight into a business’s financial operations. Along with other financial statements, income statements and balance sheets are used to track a company’s progress, identify trends, and make big business decisions. Do you know what these two forms do individually?
What is a balance sheet?
Accountants and business owners use a balance sheet to record a company’s financial situation through a certain date. There are three major components of a balance sheet: a company’s assets, liabilities, and the amount of shareholder equity. One part of the sheet will detail the assets, and the other will list liabilities and equity.
Assets come in many different forms, and will be divided into current and non-current assets on the balance sheet. Current assets, such as cash, can be quickly and easily liquidated within a year. On the other hand, non-current (also known as long-term) assets won’t easily turn into cash.
What is an income statement?
An income statement, also known as a profit and loss (P&L) statement, is a comprehensive report or revenues and expenses, gains and losses, and net income for a specific period of time. A publicly traded company lists the earnings per share on the income statement as well. Similar to the balance sheet, this document is split into two sections: operating and non-operating. The operation section lists revenues and expenses stemming directly from business operations; on the other hand, the non-operating section tracks the revenue and expenses that aren’t tied to business operations.?
What are these sheets used for?
Balance sheets essentially show a business’s net worth by determining the difference between assets and liabilities. Are you the owner of a business? Refer to the balance sheet before making big decisions, such as expanding, or for coming up with debt-payment strategies. You’ll also use this sheet when deciding whether or not you can safely make large purchases. Potential investors will look at previous balance sheets to see how well company stock typically performs, and lenders refer to the sheet when determining credit worthiness.
A company’s income statement is valuable to people beyond an accountant or a business owner, who would use the form to prepare tax returns or plan for the future, respectively. Investors refer to an income statement before investing, as the document reveals the profitability of an investment. Lenders use it to determine if a company will be profitable enough to pay back a loan.