In keeping its accounts, a company pursues two essential objectives. Firstly, it calculates, or seeks to determine, the results obtained over a given period, known as the financial year. Secondly, it presents the situation of its assets and liabilities at a precise date, namely the end of the financial year. The profit and loss account is a document that will enable us to determine whether the business has generated a profit or, on the contrary, a loss over the past year. The balance sheet, on the other hand, is a "snapshot" of the company's financial position at the end of the year.
These two concepts are often mistakenly confused. That's why it's vital for business owners to understand the difference between a balance sheet and an income statement. Here are a few keys and explanations to help you differentiate between them.
What is a balance sheet?
The balance sheet is an essential document that shows the value of a company's gross assets at a given point in time. Gross assets include all assets owned by the company.
In the balance sheet, assets are classified in two ways:
- First, according to its composition, what constitutes the asset,
- Then, according to its origin, what forms the passive.
Since this dual classification concerns the same object, the total of values entered on the assets side is equal to the total of values entered on the liabilities side, thus representing the value of gross assets.
As this double classification concerns the same object, the total of values entered on the assets side is equal to the total of values entered on the liabilities side. In both cases, the total represents the gross asset value.
Balance sheet details
In the balance sheet, company assets are classified according to their nature and economic function. Fixed assets are those intended to remain with the company over the long term, such as land, buildings, machinery, vehicles, etc. On the other hand, current assets are those intended to be replaced rapidly during the business cycle. Current assets, on the other hand, comprise assets that are intended to be rapidly replaced during the operating cycle, such as inventories, trade receivables and cash in hand.
The liabilities side of the balance sheet shows the source of the resources that enable the company to own these assets. Resources are classified as liabilities (suppliers, borrowings, etc.) or equity (personal contributions, previous profits, etc.), depending on their origin.
Profit for the year, which is shown on the income statement, is always shown on the liabilities side of the balance sheet, even in the event of a loss. In this case, the loss is deducted from the company's own resources.
What is an income statement?
The income statement is used to calculate the profit or loss for a financial year, which is the difference between income and expenses recorded during that accounting period. This period, known as the financial year, generally corresponds to the calendar year, but may vary for practical reasons.
When revenues exceed expenses (which is desirable), we speak of profit. However, if expenses exceed income, we speak of a loss.
At the end of the financial year, to show this result, the income and expense accounts are merged into a single account: the income statement. The final balance determines the profit or loss.
The income statement is prepared after carrying out the accounting inventory, notably by taking into account :
- changes in inventories,
- charges to and reversals of depreciation, amortization and provisions,
- income and expense accruals and deferrals.
Download a sample income statement here.
Income statement breakdown
The income statement details the various headings, which are subdivided into items, each representing a line in the document where the balances of the income and expense accounts are grouped together. To obtain these balances, a post-inventory balance is drawn up, showing the situation of the accounts after adjustments.
The expenses listed in the income statement correspond to the costs incurred by the company in generating revenue, in particular :
- Operating expenses: purchases of goods, raw materials, small supplies, rent, insurance, taxes, staff remuneration, etc.
- Financial expenses: agios, depreciation, etc.
- Exceptional expenses: expenses on management operations...
- Deductions from total income: employee profit-sharing, income tax, etc.
Income statement revenues, on the other hand, represent all company income, including :
- Operating income: sales of goods, provision of services, etc.
- Financial income: income from profit-sharing, discounts obtained, etc.
- Extraordinary income: insurance reimbursements, sale of fixed assets, etc.
Fundamental differences between balance sheet and income statement
Once these two elements have been clarified, three fundamental differences can be observed:
- Document layout: the balance sheet is divided into two columns, with assets on the left and liabilities on the right, while the income statement is presented in list form, with revenues at the top and expenses at the bottom.
- The balance: in the balance sheet, total assets equal total liabilities, whereas in the income statement, the balance can be either debit or credit.
- Usefulness: the balance sheet gives an overview of the company's state of health, while the income statement analyzes its performance.
Clearly, there are many differences between these two financial statements. However, they complement each other and provide a wealth of information for managers, as well as for their partners such as associates, investors, banks and suppliers. When properly balanced, they guarantee a healthy business.