Balance Sheet v Income Statement: Differences Explained Finally

Several of these issues were related to accounting and the wealth of decision-making information that accounting systems provide. If so, chances are you have heard or said the phrase “spoiler alert.” It is used to forewarn readers, viewers, or fans that the ending of a movie or book or outcome of a game is about to be revealed. Some people prefer knowing the end and skipping all of the details in the middle, while others prefer to fully immerse themselves and then discover the outcome. People often do not know or understand what accountants produce or provide. That is, they are not familiar with the “ending” of the accounting process, but that is the best place to begin the study of accounting. Janie Basile is a freelance content creator from Scotland with 20 years’ experience crafting content for insurance and technology startups and financial services companies.

Service revenue is a type of income that results from providing services to customers, such as fees collected by accountants or lawyers. A current asset is any asset that will provide an economic value for or within one year. Service revenue refers to revenue a company earns from performing a service. On the other hand, when these types of revenues are billed after work has been completed, they are usually recorded as a debit to the income statement. Service revenue may be an asset for your business, depending on its stage in life.

Sales revenue and the income statement

This guide will give you a comprehensive overview of both financial statements. For example, net income or incorporate expenses such as cost of goods sold, operating expenses, taxes, and interest expenses. While revenue is a gross amount focused just on the collection of proceeds, income or profit incorporate other aspects of a business that reports the net proceeds. While your income statement shows how much you’ve earned or lost, your balance sheet shows how you’ve spent or invested that money and how you’ve covered your shortfalls.

• This segment of the balance sheet includes return of equity (ROE), calculated by dividing net income by shareholder’s equity.
• It is calculated by subtracting all the costs of doing business from a company’s revenue.
• The critical piece to note here is that revenue does not equal cash.
• A company’s income statement shows the company’s overall profitability and how much income was made at the end of a period.
• Chris decides to do some research to determine why the balance in the checking account is lower than expected.
• The “charge” for using these assets during the period is a fraction of the original cost of the assets.

The statement may show a flow of cash from operating activities large enough to finance all projected capital needs internally rather than having to incur long-term debt or issue additional stock. Alternatively, if the company has been experiencing cash shortages, management can use the statement to determine why such shortages are occurring. Using the statement of cash flows, management may also recommend to the board of directors a reduction in dividends to conserve cash. Under cash basis accounting, transactions (i.e., a sale or a purchase) are not recorded in the financial statements until there is an exchange of cash.

The difference between a balance sheet and an income statement is the information they show and the period of time they cover. If the accrual method were used, the mechanic would recognize the revenue and any related expenses on May 29, the day the work was completed. The accrual method will be the basis for your studies here (except for our coverage of the cash flow statement in Statement of Cash Flows).

Resources for Your Growing Business

This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash. At the top of the income statement is the total amount of money brought in from sales of products or services. It’s called “gross” because expenses have not been deducted from it yet. To calculate sales revenue, multiply the number of units sold by the price per unit.

For a service company, this is the number of service hours multiplied by the billable service rate. For a retailer, this is the number of goods sold multiplied by the sales price. A company may also distinguish revenue between tangible and intangible product lines. For example, Apple products include iPad, Apple Watch, and Apple TV. Alternatively, Apple may be interested in separately analyzing its Apple Music, Apple TV+, or iCloud services.

What Goes on an Income Statement vs. Balance Sheet?

Companies use three main financial statements to record and report the financial representation of their operations and activities. These three financial statements are the balance sheet, the income statement, different types and formats of income statement and the cash flow statement. These are expenses that go toward supporting a company’s operations for a given period – for example, salaries of administrative personnel and costs of researching new products.

Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company’s sales and marketing, whereas cash flow is more of a liquidity indicator. Both revenue and cash flow should be analyzed together for a comprehensive review of a company’s financial health. Service revenue is usually classified as either debit or credit, depending on how it’s recorded.

The Three Elements of a Profit Margin

Long-term assets are often used in the production of products and services. When the organization issues common stock for the first time, it is called an initial public offering (IPO). In Corporation Accounting, you learn more about the specifics of this type of accounting. The primary goal of a business is to earn revenue by providing goods and services to customers in exchange for cash at that time or in the future. While selling other items for more than the value of the item does occur in business, these transactions are classified as gains, because these sales are infrequent and not the primary purpose of the business.

Similarly, a business whose expenses consistently exceed its revenue on its income statements is likely to eventually run out of cash and will build a balance sheet riddled with liabilities and debts. Net income is the first component of a retained earnings calculation on a periodic reporting basis. Net income is often called the bottom line since it sits at the bottom of the income statement and provides detail on a company’s earnings after all expenses have been paid. Any net income not paid to shareholders at the end of a reporting period becomes retained earnings.

The balance sheet tells you what your business owns and what it owes to others on a specific date. All documentation, including justifications and certifications related to the cost transfer, are maintained by the originating department and must be made available for post audit review. The transfer must relate to a specific item of cost incurred by the unit preparing the adjustment. The responsibility for compliance with University and Federal regulations and guidelines and for maintaining supporting documentation for transfers/adjustments is in the originating department/unit. Deans, Directors and Chairs, and those to whom authority to approve adjustments is delegated, are responsible and accountable for compliance with university and Federal regulations.

Therefore, the corporation’s cash that is reported on the December 31 balance sheet includes the $10,000 and the balance sheet will also report a current liability deferred revenues of $10,000. It is calculated by subtracting all the costs of doing business from a company’s revenue. Those costs may include COGS and operating expenses such as mortgage payments, rent, utilities, payroll, and general costs. Other costs deducted from revenue to arrive at net income can include investment losses, debt interest payments, and taxes. Also included on an income statement are realized gains and losses, also known as “other income.” These are one-time gains generated from the disposal of a company’s assets, such as the sale of property.

Chris decides to do some research to determine why the balance in the checking account is lower than expected. Her research shows that she earned a total of $1,400 from her customers but had to pay $100 to fix the brakes on her tractor, $50 for fuel, and also made a $1,000 payment to the insurance company for business insurance. The reason for the lower-than-expected balance was due to the fact that she spent ($1,150 for brakes, fuel, and insurance) only slightly less than she earned ($1,400)—a net increase of $250. While she would like the checking balance to grow each month, she realizes most of the August expenses were infrequent (brakes and insurance) and the insurance, in particular, was an unusually large expense. She is convinced the checking account balance will likely grow more in September because she will earn money from some new customers; she also anticipates having fewer expenses. A balance sheet shows a company’s assets, liabilities and equity at a specific point in time.

Although these lines can be reported in various orders, the next line after net revenues typically shows the costs of the sales. This number tells you the amount of money the company spent to produce the goods or services it sold during the accounting period. There is no line for total revenue on the income statement, aka the profit and loss statement. You put sales revenue at the top and then subtract the cost of goods sold and operating expenses to determine the total operating income. Sales revenue is an important aspect of a company’s financial statement. While it does not directly go on the balance sheet, it indirectly affects several components such as accounts receivable and retained earnings.

Stakeholders must make many decisions, and the financial statements provide information that is helpful in the decision-making process. A balance sheet is a financial statement that shows the financial picture of a company at a point in time. Usually, a balance sheet is created every fiscal quarter and at the company’s fiscal reporting year-end.

Retained Earnings

There are several components that reduce revenue reported on a company’s financial statements in accordance to accounting guidelines. Discounts on the price offered, allowances awarded to customers, or product returns are subtracted from the total amount collected. Note that some components (i.e. discounts) should only be subtracted if the unit price used in the earlier part of the formula is at market (not discount) price. It is necessary to check the cash flow statement to assess how efficiently a company collects money owed. Cash accounting, on the other hand, will only count sales as revenue when payment is received. Cash paid to a company is known as a “receipt.” It is possible to have receipts without revenue.

• This view assumes that all individuals with an interest in the business are considered within the decision.
• Inventors or entertainers may receive revenue from licensing, patents, or royalties.
• This information is provided in the income statement, statement of owner’s equity, and balance sheet.
• When you look at a balance sheet, you should be looking for balances that don’t make sense.
• If services have been performed and revenue has not yet been collected, then the amount to be collected will fall under “accounts receivable” on a company’s balance sheet.

After gathering your data at different stages of the sales cycle, it’s important to look for strange anomalies, like coding errors or sudden spikes and dips. A good sales process is the foundation of any successful sales organization. Learn how to improve your sales process and close more deals with this free guide. Answer the question(s) below to see how well you understand the topics covered above. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times. When you look at a balance sheet, you should be looking for balances that don’t make sense.