Balance sheets and income statements are both important documents in identifying a company’s financial status. Each document compares positive and negative aspects of a company’s finances. While the balance sheet and income statement compare different things, items on one document often relate to items on the other in terms of business operations.
The heading of a balance sheet lists assets and liabilities. Assets are resources owned by a company that have value. Some examples of assets include cash, buildings, equipment and products. Liabilities are the obligations of a company. One easy way to remember the difference between assets and liabilities is to remember that assets are things owned while liabilities are things owed.
The heading of an income statement lists profits and losses for a specified period of time. Thus, it is a record of a company’s profitability for that time period. Profits may come from a business’s primary activities or from secondary activities such as interest earned on cash. Losses include operating expenses as well as other losses. For example, if a company sells one of its assets for less than the book value, the difference between the book value and the sales price is recorded as a loss.
Assets & Profits
Both assets and profits have value to a company, but they are different. Many kinds of assets aid a company in operating, which in turn allows the company to generate profits. For example, consider a shipping company that owns a warehouse. The warehouse has value itself, but it also is a necessary component in the company’s shipping activities, through which the company generates profits.
Liabilities & Losses
Liabilities include the amounts owed to creditors as well as salaries and taxes. On the other hand, losses are listed on the income statement because they include the regular operating expenses. One thing illustrating this difference is the fact that commissions are listed on the income statement, while regular salaries are listed on the balance sheet. Companies are able to account for most liabilities in advance, whereas losses may occur unexpectedly, as in cases where a company sells an asset and receives less money than expected.
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