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Difference Between Balance Sheet And Income Statement Essay

Accounting Income Statements, Balance Sheets

Accounting is the science of recording, arrangement and summarising everyday business transactions, generally in terms of money, and includes the checking, analyzing, understanding and reporting to the interested users in the dealings of the individual, firm, company, government or the nation to which the transactions relate. final reports for most accounting are the balance sheet, describing the position from the start of the year to the current year, and the income statement, a statement of the recent year's performance. the main accounting assumption and principles guide the formation of these 2 final reports.

Income statement is a report that shows the result of company's earnings for a specific period of time. It reports all the revenues earned minus the expenses which results in either profit or loss. If revenue exceeds the expenses, it will incur a profit. But if the expenses are greater than the revenue, the company will report a net loss. When preparing an income statement, it is important for the company to indicate the length of time it took to realize the profit or loss. The length of time can be for a month, three months, six months or for the full year. Someone who just started a business may want to monitor their business performance during the early part of the business establishment, therefore a monthly income statement would be helpful for the owners. Income statement is useful to anyone who would like to determine if the company is performing well or not as it shows whether profits are being made at any specific period of time.

Income statement is also known as profit and loss statement, operating statement or statement of financial performance.

Income statement is expressed in the following equation:Revenue - Expenses = Net Profit or LossThe two components of income statement are the revenue and expenses. Revenue increases the owners wealth through as a result of the sale of goods or services. Example of revenue are: cash received for the sale of goods, interest or rental payment. Expenses are decreases in the owners' equity in the form of reduction of assets or increases in liabilities. Example of expenses are: salaries or wages, rent, telephone, repairs and others.

Balance Sheet is a report that shows the financial position at a specific point in time. It shows how much assets have been accumulated at the end of the accounting period, how much payables are still outstanding at the end of the accounting period, etc). Balance sheet is divided into three sections: assets, liabilities and owners equity.

Balance is expressed in the following equation:Assets - Liabilities - Owners equityAssets is defined as future economic benefits controlled by an entity as a result of past transactions or other events. An example of assets are: land, buildings and equipment. Assets can be converted into cash in the event that the...

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As a manager or business owner, you should be familiar with the basic financial statements used in business. Two of these basic statements are the income statement and the balance sheet. While they both contain essential information for your business, they are very different documents. You don't have to be an accountant or bookkeeper to understand their differences, or the information they convey about your business.

Differences of Time Frame

The income statement provides a look at your business activities over a period of time, and the length of this period can vary. For example, annual statements will contain information for the entire year while quarterly statements cover three months. The chosen time frame should be clearly indicated on any income statement. The balance sheet, on the other hand, represents a snapshot of your company's finances at one specific point in time. The balance sheet must be dated and values expressed on it are only accurate as of that date.

Differences of Content

The income statement documents all of a business's income and expenses over a period of time. Revenue is documented in the credit account on the income statement while expenses are recorded as debits. The balance sheet's snapshot of your company's finances reports three items: Assets, liabilities and owners' equity. Assets are properties of value owned by the company, liabilities are financial obligations of the company and owners' equity is the value of the company to shareholders.

Differences of Purpose

The income statement is also known as a profit and loss statement. The primary purpose of an income statement is to determine how much money a company earned or lost over a period of time. Because the income statement breaks earnings and expenses down into categories, it's possible for managers to identify sources of profits and losses. The balance sheet is also known as the statement of financial position, because it gives managers and investors an overview of where the company stands financially.

A Few Different Calculations

The income statement requires just one simple set of calculations: Add up the company's revenue and add up all of its expenses, and then subtract expenses from revenue to reveal the company's profit or loss. You must perform a few basic calculations on the balance sheet as well. To calculate owners' equity, subtract the firm's liabilities from its assets. The firm's assets must always be equal to liabilities and owners' equity on the balance sheet.

About the Author

M. Scilly is a writer and editor who writes for various online publications, specializing in business and management. He has a fondness for travel and photography. In his free time he enjoys marathon training.

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