App version: 0.1.0

Comparing Income Statements and Balance Sheets

Balance Sheet vs Income Statement Compared
Lauren Ward

Lauren Ward

Updated June 3, 2022
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Balance sheets and income statements are two key financial statements that reflect a business’s health and profitability. The key difference? The balance sheet lists what your company owns and owes, while the income statement shows your company’s earnings for a given time frame. You need both statements to get a sense of your company’s overall position. You’ll also need both statements if you ever decide to apply for a small business loan. Read on to learn the role each of these financial statements play and how they can be useful to your small business.

How Are Balance Sheets and Income Statements Related?

Both balance sheets and income statements are two of the three major financial statements that show a company’s activities and profitability for each accounting period. (The third is the cash flow statement, which shows how well a company manages cash to fund operations and any expansion efforts.) The income statement gives your company a picture of what the business performance has been during a given period, while the balance sheet gives you a snapshot of your company’s assets and liabilities at a specific point in time. Together, they show just how well the company is performing, how much it is worth, and where there are opportunities to improve. Lenders also look at these statements to determine if a company is capable of taking on a short or long-term business loan.While these two business statements are different, they are related. The information from a balance sheet is used to complete an income statement. And, when a company has a strong income statement, it will usually have a good balance sheet. However, that’s not always the case, which is why both statements are important. 

What Is a Balance Sheet and How Does It Work?

The balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at the end of an accounting period. When this information is paired together, a balance sheet shows a company’s net worth at a given time. Both lenders and investors use balance sheets to determine how financially stable a company is. Information on a balance sheet can also be used to calculate many different financial ratiosThe balance sheet shows an accounting equation where assets, on one side, equal equity plus liabilities, on the other. A company’s total assets need to equal total liabilities plus equity for the balance sheet to be considered “balanced.”Here’s a closer look at what's typically included on a balance sheet.

Total Assets

  1. Current assets: Any asset that can be liquidated or sold within one year or less. Examples of current assets…
  • Accounts receivable
  • Cash
  • Inventory
  • Marketable securities
  • Prepaid expenses
  1. Noncurrent assets: Any assets that can not be easily liquidated in one year or less. A long-term asset is essentially anything that is not a current asset. Examples include…
  • Commercial real estate
  • Land
  • Heavy equipment
  • Manufacturing equipment
  • Manufacturing plant
  • Patent
  • Trademarks
  • Vehicles

Total Liabilities

  1. Current liabilities: Any liability that is to be paid within a year or less. Examples of current liabilities include…
  • Accounts payable
  • Notes payable
  • Payroll
  • [Payroll expenses
  • Rent payments
  • Utility payments
  • Debt financing
  • Accounts payable
  • Other accrued expenses]
  1. Long-term liabilities: Long-term liabilities include any debts which will not be due within one year.  Examples include…
  • Loans
  • Provisions for pensions
  • Bonds payable
  • Deferred tax liabilities

Owners’ Equity

Also known as shareholders’ equity, this typically refers to anything that belongs to the owners of a business after any liabilities are accounted for. Owners’ equity typically includes two elements: Money, which is contributed to the business in the form of an investment in exchange for some degree of ownership (typically represented by shares); and earnings that the company generates over time and retains.The formula to calculate owners’ equity is:Total Assets - Total Liabilities = Owners’ Equity

What Is an Income Statement and How Does It Work?

An income statement (also called a profit and loss statement) tells you how much money a business made, and how much it spent, over a particular period (often a fiscal quarter or fiscal year). The income statement shows whether a company is generating a profit or loss. It also provides valuable information about revenue, sales, and expenses. Analysts and business owners use income statements to keep a close eye on the relationship between revenue and expenses. It’s always good when revenue increases, but if expenses increase, too, they could erase any profits. Ideally, revenue should always outweigh expenses. Often, investors and lenders will pay close attention to the operating section of the income statement. This can indicate the efficiency of the company’s management and show how its performance compares to its industry peers.Common information listed on an income statement includes: 

Expenses

Expenses are generally broken down into four categories. Operating costs: Operating costs revolve around the administration of the business. Common operating costs include…
  • Advertising
  • Insurance
  • Maintenance
  • Office supplies
  • Payroll
  • Property taxes
  • Rent
  • Travel
  • Utilities
Cost of goods sold: Any purchased or manufactured goods come with a cost. Knowing the cost of goods sold (COGS) helps you determine how much profit a company makes on each sale. Other variables associated with COGS include…
  • Labor
  • Storage
  • Shipping
  • Freight
  • Cost of raw materials
Interest expenses: Any interest paid on business loans is considered a business expense. Depreciation: Depreciation is when the cost of a tangible asset is deducted over the course of its useful life. A business that relies on a physical asset to make money would allocate the cost of that asset for however long it is expected to remain functional. Amortization: Similar to depreciation, amortization spreads the cost of intangible assets, such as software, patents, trademarks, and copyrights, over the cost of their useful life. 

Revenue

Revenue is any money received from normal business operations. There are two types of revenue.Operating revenue: This is the money a business earns from its core business transactions. For many small businesses, operating revenue is where a company makes most of its money.Non-operating revenue: This is any money a business receives that does not stem from its core business activities. This includes interest, rent, and money earned from selling assets. 

Comparing Income Statements and Balance Sheets

Key Differences

Income statements and balance sheets differ in five key areas.

Timing

Income statements show total expenses and revenue for a period of time. Balance sheets, on the other hand, show a company’s assets and liabilities at a specific moment in time. 

Reporting

Income statements report expenses and revenue; balance sheets report equity, assets, liabilities, and equity. 

Usage

Income statements are used to evaluate performance and see if there are any financial discrepancies that need to be adjusted. For example, if expenses increase without a proportional increase in revenue, then changes are needed. Balance sheets are used to calculate whether a company’s assets are able to cover its current and long-term liabilities. Does it have enough money to pay for all of its expenses? 

Performance

Income statements illustrate a company’s overall financial performance. Balance sheets do not. 

Creditworthiness

Lenders will look at a company’s balance sheet to determine if they should extend credit to that business and if a business has collateral to secure a business loan. They use the income statement to determine how much debt a company can handle. Recommended: Minimum Credit Scores for Business Loans

Common Factors

While income statements and balance sheets have differences, they also have some things in common. Both statements, for example, are useful in determining the financial strength of a company. In addition, both are used by creditors and investors when deciding on whether or not to become involved with a company. The two statements also contribute to one another. As a result, any mistake or omission in one financial report can create an error in the other. For example: 
  • The revenue reported on an income statement affects the assets on a balance sheet.
  • Outstanding debts reported on a balance sheet affect expenses on an income statement.
  • Rent received under non-operating revenue can affect assets on a balance sheet.

What Income Statements Are Used For vs Balance Sheets

The Takeaway

An income statement reflects the movement of money. It measures how much money a business received and how much it spent during a certain time period. Overall, it shows the financial health of a company and whether or not a company is profitable.A balance sheet, on the other hand, reports on a company’s assets and liabilities (how much it owns and owes), as well as long-term investments, at a certain point in time. Together, they provide a fuller picture of a company's current health and future prospects. The balance sheet shows how well a business is utilizing debt and assets to generate revenue that gets carried over to the income statement. If you are shopping for a small business loan, lenders will look at both statements, as well as your business's credit score, to determine your company’s eligibility for financing. Assets reported on a balance sheet tell a lender if your business has collateral that can be used to secure a loan. The revenue and expenses reported on an income statement show whether your company can afford to take on monthly debt.  

3 Small Business Loan Tips

  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
  2. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.
  3. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.

Photo credit: iStock/LaylaBird
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0122027

Frequently Asked Questions

Is an income statement part of a balance sheet?
Is a balance sheet or an income statement more important?
Is an income statement the same as profit and loss?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
Share this article: