What are the key differences between income statements and balance sheets?

Income statements show a company's profitability over a period, while balance sheets provide a snapshot of its financial position at a specific point in time.

An income statement, also known as a profit and loss statement, is a financial document that summarises a company's revenues, costs, and expenses over a specific period. This could be a quarter, a half-year, or a full fiscal year. The main components of an income statement are revenues, cost of goods sold (COGS), gross profit, operating expenses, operating income, non-operating income and expenses, pre-tax income, income tax, and net income. The bottom line, or net income, shows the company's profitability after all expenses have been deducted from revenues.

On the other hand, a balance sheet provides a snapshot of a company's financial position at a specific point in time, usually at the end of a fiscal quarter or year. It is structured around the fundamental equation: Assets = Liabilities + Equity. Assets are what a company owns, such as cash, inventory, and property. Liabilities are what a company owes, such as loans and accounts payable. Equity, also known as shareholders' equity, is the residual interest in the assets of the company after deducting liabilities. It represents the net assets that the shareholders would receive if the company were liquidated.

While both documents are essential for understanding a company's financial health, they serve different purposes. The income statement provides information about a company's ability to generate profit by increasing revenue, reducing costs, or both. It helps investors and creditors predict the amounts, timing, and uncertainty of future cash. The balance sheet, however, shows what a company owns and owes, as well as the amount invested by shareholders. It provides information about liquidity, solvency, and the company's ability to adapt to changes in circumstances.

In summary, the income statement and balance sheet are two of the three main financial statements used by businesses, the third being the cash flow statement. They provide different but complementary perspectives on a company's financial performance and position.