Income Statement vs. Balance Sheet: What Each One Tells You

The core difference: a period versus a moment

An income statement covers a span, like a month or year. A balance sheet is a snapshot on one day. One measures performance; the other measures position.

Think of a video and a photograph. The income statement is the video: revenue and expenses across a month, quarter or year, ending in net income. The balance sheet is the photograph: assets, liabilities and owner equity as of, say, December 31.

Neither tells the full story alone. A business can show a profit on the income statement while running short of cash, and it can hold lots of cash while losing money. Both statements together, plus a cash flow statement, give the complete picture. See balance sheets, income statements and cash flow.

What the income statement contains

It lists revenue, subtracts cost of goods and operating expenses, and ends with net income. It is also called a profit and loss statement or P&L.

The usual order is:

1. Revenue, the sales you earned
2. Cost of goods sold, what it cost to produce what you sold
3. Gross profit, revenue minus cost of goods
4. Operating expenses, such as rent, payroll and marketing
5. Operating income, then interest and taxes
6. Net income, the bottom line

Use it to see margins, spot expenses growing faster than sales and compare periods. Learn more in the income statement guide and what is gross profit.

What the balance sheet contains

It lists assets, liabilities and equity. Assets must equal liabilities plus equity, which is why it is called a balance sheet.

The three sections:

• Assets. Cash, accounts receivable, inventory, equipment, property.
• Liabilities. Accounts payable, loans, credit lines, taxes owed.
• Equity. The owners' stake: money invested plus retained earnings.

It answers questions like: How much cash do we have? Who owes us? What do we owe, and when? Is debt rising faster than assets? See understanding the balance sheet and the accounting equation.

Side by side

The income statement answers 'Did we make money?' and the balance sheet answers 'What is our financial position?'

The two connect: net income from the income statement flows into retained earnings on the balance sheet.

How lenders and funders use them

Lenders use the income statement to judge earning power and the balance sheet to judge debt load and liquidity. Together they show whether you can handle a payment.

A lender may calculate ratios from both statements, such as profit margin, current ratio and debt-to-equity. See current ratio and the debt-to-equity ratio. They also check for red flags covered in spotting red flags in financial statements.

Inaccurate statements damage trust, so reconcile your books before sending them. Our report guide lists what small businesses should produce regularly.

Using your statements to plan funding

Statements show how much payment the business can carry. Compare projected added profit to the funding cost before you borrow.

Start with the income statement to see average monthly profit, then use the balance sheet to check existing debt and cash reserves. If an investment adds profit well above its monthly cost, it is worth exploring. See how much funding your business can afford.

ROI Funder reviews an application and 3 months of business bank statements for businesses with 6+ months of operation, $20,000+ monthly revenue and 500+ FICO. Financial statements help you prepare, and your funding options include working capital and a business line of credit. A soft credit pull applies.