Income Statement vs Balance Sheet: Key Differences Explained

Financial statements are invaluable tools for gauging a company’s financial performance and position. The income statement and balance sheet are two of the most important financial statements, providing crucial insights into a company’s profitability and financial health. But what exactly do these statements show and what are the key differences between them?

Overview of the Income Statement

An income statement, also known as a profit and loss (P&L) statement, summarizes a company’s revenues, expenses, and net income over a specific period of time It shows the company’s ability to generate profits by increasing revenue and managing costs

Some key things the income statement shows:

• Operating revenue from sales of products and services
• Non-operating revenue like interest, dividends, and rent income
• Cost of goods sold
• Operating expenses like salaries, utilities, marketing
• Depreciation and amortization
• Net profit before and after tax

By analyzing income statement ratios like gross margin, operating margin, and net profit margin, investors can assess the company’s profitability and efficiency. The income statement is prepared monthly, quarterly, and annually. Public companies are required to file quarterly and annual income statements.

Overview of the Balance Sheet

A balance sheet provides a snapshot of a company’s financial position at a specific point in time. It lists the company’s assets, liabilities, and shareholders’ equity as of a particular date.

Some key things the balance sheet shows:

• Current assets like cash, accounts receivable, inventory
• Long-term assets like property, plant, equipment
• Intangible assets like goodwill, patents, trademarks
• Current liabilities like accounts payable, short-term debt
• Long-term debt and other non-current liabilities
• Shareholders’ equity

The balance sheet follows the accounting equation:

Assets = Liabilities + Shareholders’ Equity

By analyzing balance sheet ratios like the current ratio, debt-to-equity ratio, and working capital, investors can evaluate the company’s liquidity, leverage, and ability to meet short-term obligations. Public companies file balance sheets quarterly and annually.

Key Differences Between the Income Statement and Balance Sheet

While both offer valuable insights into a company’s finances, there are several important ways that income statements and balance sheets differ:

1. Purpose

• The income statement shows profitability over a period of time.
• The balance sheet shows financial position at a point in time.

2. Structure

• Income statements show revenues minus expenses.
• Balance sheets use the accounting equation: Assets = Liabilities + Equity.

3. Scope

• Income statements cover a period like a quarter or year.
• Balance sheets provide a snapshot at a single moment.

4. Transactions

• The income statement reflects transactions over a period that impact net income.
• The balance sheet reflects all transactions since inception that impact the accounting equation.

5. Analysis

• Income statement ratios assess profitability and efficiency.
• Balance sheet ratios assess liquidity, solvency, and leverage.

How the Statements Are Connected

While the income statement and balance sheet differ in several ways, they are closely connected in accounting.

• Net income from the income statement impacts retained earnings on the balance sheet. Higher profits increase retained earnings.
• Revenue and expenses on the income statement impact assets and liabilities on the balance sheet.
• Changes in asset and liability balances on the balance sheet can impact revenues and expenses on the income statement.

To fully assess a company’s finances, analysts look at both statements together, as well as the statement of cash flows. The full set of financial statements provides the complete picture.

Real World Examples

Let’s look at some real world examples to see these financial statements in practice. Below are snapshots of the 2021 income statement and year-end balance sheet for Apple Inc. (AAPL):

Apple Inc. Consolidated Income Statement 2021 (Abbreviated)

| Amounts in $ millions|
|-|-|
|Total net sales (revenue)| $365,817|
|Total operating expenses| $306,308|
|Operating income (profit)| $59,509|
|Net income (profit after tax)| $94,680|

Apple Inc. Consolidated Balance Sheet 2021 (Abbreviated)

| Amounts in $ millions|
|-|-|
| Total assets | $320,332 |
| Total liabilities | $248,597 |
| Total shareholders’ equity | $71,735 |

For Apple, the income statement shows strong revenue and profit growth during 2021. The balance sheet shows the company increased assets and liabilities to support growth, while also boosting shareholders’ equity through retained earnings. Together, these statements provide a complete overview of Apple’s financial performance and health.

Key Takeaways: Income Statement vs. Balance Sheet

• The income statement reports profitability over a period of time. The balance sheet reports financial position at a point in time.
• Income statements show revenues, expenses, and profit. Balance sheets show assets, liabilities, and shareholders’ equity.
• Income statement ratios evaluate earnings performance. Balance sheet ratios evaluate liquidity and solvency.
• The statements are connected, but have several key differences in purpose, structure, scope, and analysis.
• To fully evaluate a company’s finances, analysts examine the income statement, balance sheet, statement of cash flows, and associated ratios together.