Comparison between a Balance Sheet and an Income Statement - Essay Example

Comparison between a Balance Sheet and an Income ment Comparison between a Balance Sheet and an Income Statement Introduction An income statement, on the other hand, shows how much money a company gained or lost during a particular period. Additionally, it enables managers to determine sources of profits or losses. A balance sheet is a reflection of a company’s assets, liabilities, and shareholders’ equity at the end of a given financial year. A balance sheet enables managers to determine the financial position of a company.

Hence, a balance sheet is more useful in determining the sustainability of the business compared to an income statement. Discussion Difference A balance sheet follows the general structure of Assets = Liabilities + Owners’ Equity, which means that the summation of all assets (short term or long term) must equal the liabilities and shareholders’ equity. Investors and company management need this information to determine the current value of a company. An income statement, like the balance sheet, shows the value of the company because it shows whether the company is operating at a loss or at a profit.

An income statement portrays a company revenues vis a vis the expenses, gains, and losses after taxation for a specific period of time, be it annually, monthly, quarterly, or semiannually. Relationship Although the two financial statements are two different statements, they are closely related in that, a company’s profit and loss statement directly affects the shareholders’ equity. In the event that a company posted $30,000 increase owner’s equity compared to the previous year and the owner did not invest or withdraw assets from the business, then the increase represents the net income for the year.

However, if the owner had withdrawn $15,000 in assets for personal use, then the net income must have been $45,000 to produce the $30,000 increase in shareholders’ equity. Conclusion A balance sheet is more useful in determining the sustainability of a company as it outlines a company’s assets in comparison to the liabilities. The relationship between a balance sheet and an income statement is a result of the double entry system that prescribes Assets = Liabilities + Owner’s Equity. Although these statements appear different, they both represent the value of a company.

References Fraser, L., & Ormiston, A. (2001). Understanding financial statements. Upper Saddle River, N.J.: Prentice Hall. Kimmel, P., Weygandt, J., & Kieso, D. (2007). Financial accounting. Hoboken, NJ: John Wiley. Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons.