Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?
Balance sheets and income statements are important tools to help you understand the health and prospects of your business, but the two differ in key ways. This guide will give you a comprehensive overview of both financial statements. Show
The balance sheet and income statement represent important information regarding the financial performance and health of a business. An income statement assesses the profit or loss of a business over a period of time, whereas a balance sheet shows the financial position of the business at a specific point in time. Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs. The balance sheet and income statement complement each other in providing a complete picture of a company’s financial position and future prospects. Both are crucial for decision-makers, investors and financial institutions. If you don’t have a background in accounting or finance, these terms may seem daunting at first, but reading and analyzing financial statements remains a requisite skill for business owners and executives. What is a balance sheet?The balance sheet is the cornerstone of a company’s financial statements, providing a snapshot of its financial position at a certain point in time. It includes what the company owns (its assets), what it owes (its liabilities), and owner’s equity, which includes money initially invested in the company, along with any retained earnings attributable to the owners or shareholders. This statement is divided into two columns, based on the following equation:
This equation forms the foundation of a balance sheet, with assets in one column, equal to the liabilities and the owner’s equity in the other. The balance sheet reflects the company’s performance since its inception, encompassing every single transaction, the amounts raised, the debts accumulated, the assets acquired, and their present valuations, all presented in a single statement. This provides insight into the operations, finances and future prospects of the company using financial ratios such as debt-to-equity, which reflects the company’s ability to pay its debts using equity, or the current ratio, which divides current assets by current liabilities to determine the company’s ability to meet its obligations over the next 12 months. Did you know? The acid-test ratio adds further clarity to the current ratio by only considering easy-to-liquidate assets, providing a more accurate picture of a company’s ability to meet obligations.What’s included in a balance sheet?The balance sheet comprises assets, liabilities and owner’s equity toward the end of the accounting period. Assets
Liabilities
Owner’s or shareholder’s equityIn simple terms, owner’s or shareholder’s equity is equal to the total assets attributable to owners or shareholders in the event of the company’s liquidation, after paying all debts or liabilities. This segment of the balance sheet includes return of equity (ROE), calculated by dividing net income by shareholder’s equity. ROE measures management’s effectiveness in employing and driving returns based on equity. Shareholder’s equity also includes retained earnings – the portion of the net income that hasn’t been distributed to shareholders as dividends – to be used for funding further growth and expansion of the business. FYI: Management will generally aim to maximize return on equity, and return funds to shareholders in the form of dividends or share repurchases when it is unable to generate sufficient returns with these retained earnings.What is an income statement?Also known as the profit and loss (P&L) statement, the income statement summarizes the financial performance of a business during a specific period, reporting revenues, cost of goods sold, overheads, and the net profit attributable to shareholders. The P&L statement is one of three key financial statements a business releases, either quarterly, annually, or both if it’s a public company. It keeps track of profitability, income sources, expenses and budgets, allowing the company to take action against variances from projections. Investors and lenders pay attention to the P&L statement, especially when comparing different periods to determine the long-term trajectory of the company. To a skilled analyst, the data presented in a profit and loss statement can provide deep insights with the use of ratios. These include the gross and operating margin ratio, which highlights the company’s profitability in relation to the sales and expenses incurred; the price-earning and return-of-equity ratios to assess efficiency in capital allocation; and the times-interest-earned (TIE) ratio to measure the margin of safety a company has to meet its debt payments. What’s included in an income statement?The income statement focuses on four key items: sales revenues, expenses, gains and losses. It does not concern itself with cash or non-cash sales, or anything regarding cash flow.
What are the differences between a balance sheet and income statement?Here is a quick reference for the key differences between the balance sheet and income statement, summarizing what we’ve discussed above.
What are the similarities between an income statement and a balance sheet?The balance sheet and income statements complement one another in painting a clear picture of a company’s financial position and prospects, so they have similarities. Along with the cash flow statement, they comprise the core of financial reporting. Errors or omissions in either of them create inaccurate results across all of them. The income statement and balance sheet follow the same accounting cycle, with the balance sheet created right after the income statement. If the company reports profits worth $10,000 during a period, and there are no drawings or dividends, that amount is added to the shareholder’s equity in the balance sheet. These and other similarities keep them reliant on each other and make them both essential in providing a clear and complete picture of accounts. Can accounting software help you manage income statements and balance sheets?Given the importance of income statements and balance sheets in financial reporting, accounting software is invaluable. It can reduce mistakes or omissions that would result in flawed or inaccurate financial statements. There are many accounting tools and solutions, which you can read about in our review of QuickBooks accounting software or our FreshBooks accounting software review. There are accounting tools that cater to organizations of all types and sizes. Here are some of the best accounting software solutions, with budget pricing and intuitive user interfaces that can make accounting less daunting. Which financial statement summarizes the revenue generated and the expenses incurred by a firm during the accounting period?A P&L statement, often referred to as the income statement, is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period of time, usually a fiscal year or quarter.
What is the name of the financial statement that includes revenue and expenses?Also known as the profit and loss statement (P&L), or the statement of revenue and expense, the income statement primarily focuses on the company's revenue and expenses during a particular period.
What is a balance sheet vs income statement?The balance sheet offers a snapshot in time, illustrating all that your company currently owns (assets and equity) and owes (liabilities). The income statement, on the other hand, records your revenue and expenses (and, consequently, net profit) within a specific period of time.
What is profit and loss statement in business?A profit and loss (or income) statement lists your sales and expenses. It tells you how much profit you're making, or how much you're losing. You usually complete a profit and loss statement every month, quarter or year.
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