Balance sheet vs income statement: Key differences and how to use each

Keeping track of your business’s finances can feel like herding kittens. So many numbers from so many sources and not nearly enough time to deal with them all. It’s no surprise, then, that 58% of business leaders say closing the books takes up more time than it should. 

The accounting cycle and different types of accounting methods—not to mention financial software—help bring structure to the chaos and help you make sense of all the moving parts. 

Your financial statements are at the heart of it all. Two of the most important are your balance sheet and your income statement. They serve different purposes but are key to accurate financial analysis, assessing your company’s financial health, and making smart business decisions. 

In this article, you’ll learn the difference between a balance sheet and an income statement, when and how to use them, and how Rippling makes financial management a whole lot easier.

What are the three main financial statements?

Whether you’re running a small startup or a global enterprise, you need accurate financial statements—like a balance sheet, income statement, and cash flow statement—to track revenue, expenses, and profit. Without them, you'd be in the dark about how your business is really doing. 

These three statements form the foundation of strategic financial planning, tax compliance, and investor communication:

• Balance sheet: These documents show what a company owns, owes, and is worth at a specific moment in time. It helps you understand your company’s net worth and financial stability.

• Income statement: Also known as a profit and loss statement (P&L), income statements summarize revenues, expenses, and net profit or loss over a fixed period. They help you assess profitability and make smarter budgeting decisions. 

• Cash flow statement: These financial statements track how money moves in and out of your business. They‘re key in evaluating your company’s liquidity, cash flow, and ability to cover short-term obligations. 

Understanding the income statement vs. balance sheet vs. cash flow helps you get a clear view of your company’s financial health, allowing you to gauge profit, spot inefficiencies, and plan for growth.

What is a balance sheet?

A balance sheet is a key financial document that provides a snapshot of a company’s financial picture on a specific date. There are three core components to a balance sheet:

• Assets: Everything the business owns—cash, inventory, equipment, and more

• Liabilities: What the business owes—like loans, bills, and other debts

• Equity: The owner’s interest after you subtract liabilities from assets

A typical balance sheet is divided into three sections or columns, one for each of the core components above. Assets go in one section and are divided into current and non-current assets. Under current assets, you’ll find a line item for cash and equivalents. This figure comes from your cash flow statement.

The following section or column of your balance sheet is liabilities. They’re organized the same way, broken down into short- and long-term liabilities. 

The final section or column is for equity, which is a calculation of the owner's share of the company. 

When complete, the balance sheet reveals the financial position of the company at a specific moment—what it owns (assets), owes (liabilities), and the owner’s share (shareholders equity).

When do you need a balance sheet?

A balance sheet is essential in many business situations. Because it shows your company’s financial position at a specific point in time—like right now—it becomes a key document in the following scenarios:

Applying for a loan

Applying for a loan or funding? Lenders will want to know your financial condition, especially your liability and equity. This allows them to evaluate the risk of doing business with your company. If your balance sheet is strong, with sound assets, limited liabilities, and a healthy equity position, lenders will view you as lower risk, increasing your chances of securing better loan terms.

Attracting investors

Investors assess their risk in much the same way as lenders do. Your balance sheet reveals how stable your business is and how much potential it has for future growth. A positive balance sheet signals that your company is a good bet for investors seeking low-risk, well-managed businesses.

Assessing solvency

Balance sheets aren't just for lenders and investors. They also help managers and other stakeholders shape their business decisions. Company leaders use balance sheets to monitor financial health, manage resources, and influence strategic decisions so that the organization remains stable, solvent, and future-ready.

Meeting regulatory requirements

As part of financial reporting requirements, regulators may request balance sheets. They use these to ensure that you’re following your regulatory obligations and reporting your numbers accurately. Regulators will comb through your financials, checking for transparency, accuracy, and legal compliance. This is especially important in heavily regulated sectors like banking, where early risk detection helps maintain economic stability. 

What is an income statement?

An income statement is a summary of your company’s revenues, profits, expenses, and losses over a fixed period, typically quarterly or annually. You may also hear an income statement referred to as a profit and loss statement. They’re essentially the same thing, as they both provide a snapshot of your company’s financial health by showing you net profit or loss. Income statements are a regular part of bookkeeping for most for-profit businesses, and non-profits can also use them to monitor cash flow. 

Income statements comprise three main components that show how money moves through your business: 

Revenue

A company’s revenue is the total amount earned from the sales of products or services. This is a key figure because it shows you how much money came in before any expenses. This amount is also known as your ‘top line’. 

Expenses 

Expenses are what a company pays to keep things running. This includes categories like wages, rent, utilities, materials, and marketing. Tracking expenses reveals the true cost of generating revenue and exactly where your money is going. 

Net income 

Net income (or profit or net earnings) is the amount left over after you subtract expenses from revenue. This is your ‘bottom line’ and indicates how much money you made (or lost) during the reporting period. If your net income is a positive number, that’s your profit. If the number is negative, it means that you lost money and need to look at ways to turn things around. 

When do you need an income statement?

If you don’t know where the money’s going, how can you make smart business decisions or track your company’s financial health? That’s where an income statement comes in. It allows organizations and stakeholders to monitor critical financial data so they can budget and plan effectively. 

Income statements reflect business performance over a period of time and are invaluable for tracking profit, managing expenses, evaluating revenue trends, and reporting to internal and external stakeholders. 

Internal stakeholders, like executives and managers, use income statements when they’re making decisions about allocating resources or managing cash flow. 

External stakeholders, like banks and investors, use income statements in several ways. For example, lenders use income statements to assess financial performance and determine loan eligibility and terms. Investors comb through these reports to evaluate return potential before offering funding.

What is the difference between an income statement and a balance sheet?

The income statement and balance sheet are two of the most important financial reports in business, but they serve distinct roles. 

• The income statement shows how your business performed over a set period, reporting revenue and expenses to calculate profit or loss. 

• The balance sheet gives you an overview of your company’s assets and liabilities at a particular moment. 

So, what’s the difference between a balance sheet and an income statement? It’s about timing and focus. 

Timeframe

Income statements track a company’s performance over a set period (i.e., month, quarter, or year) and show you the amount of money that moved in and out during that time. In contrast, balance sheets show your financial standing at a specific time. This matters because the income statement reveals trends and progress over time, while the balance sheet details your financial standing today.

Purpose

The primary purpose of an income statement is to show profitability. Did you make or lose money during your reporting period? On the other hand, the balance sheet identifies and itemizes your company's assets, liabilities, and owner’s equity. The income statement helps you evaluate your performance, while the balance sheet shows where the business stands right now. 

Main sections

Income statements zero in on revenue, costs, and expenses to reveal net profit or loss. Balance sheets look at what you own (assets), what you owe (liabilities), and equity. Think of the two statements as different chapters, each one revealing a different side of your finances.

Financial insights

Income statements help you see how efficient and profitable your business is by tracking your revenue and expenses. Balance sheets reveal what you owe and what you own. Taken together, you get a clear picture of your profitability and whether you have the necessary resources to keep your business running. 

Role in decision-making

Leadership teams use income statements to find ways to boost profit margins and cut costs. They use balance sheets to make wise decisions about borrowing, investing, and managing risk by detailing the business’s holdings and debts. Each statement supports a different type of decision: tactical vs. strategic. 

Compliance and reporting use

The income statement is used to keep you compliant with financial rules, while the balance sheet tracks loan covenants, financial ratios, and reporting deadlines. Both help you stay in good standing with lenders and regulators.

Accounting equations

Income statements follow this equation: Revenue - Expenses = Net Income. Balance sheets follow a different equation: Assets = Liabilities + Equity. While these formulas might seem basic, they can highlight discrepancies that need a closer look. 

Automate expenses with complete control

See Rippling

What goes on a balance sheet vs. an income statement

Let’s dive a little deeper into key financial components included in balance sheets and income statements. 

As we’ve seen, balance sheets have three main categories: assets, liabilities, and shareholders’ equity. But let’s break those elements down to better understand what each category typically represents. 

Assets

• Current assets

  • Cash

  • Accounts receivable

  • Inventory

  • Prepaid expenses (payments made for future services or goods)

• Long-term assets

  • Long-term investments

  • Property, plant, and equipment (less accumulated depreciation)

  • Intangible assets (patents, trademarks, and copyrights)

Liabilities

• Current liabilities 

  • Accounts payable

  • Short-term loans

  • Income taxes payable

  • Accrued salaries and wages

  • Unearned or deferred revenue (payments received before goods or services are delivered)

  • Current portion of long-term debt

• Long-term liabilities

  • Long-term debt

  • Deferred income tax

  • Other long-term liabilities

Equity

• Owner's equity

  • Owner's investment

  • Retained earnings

Income statements offer a glimpse into how your business earns and spends money. They detail your organization’s revenues, expenses, and net income over a specific period. These are common elements and examples you’ll find on a typical income statement: 

Revenue

• Sales of goods revenue

• Gain on sales of assets

Cost of goods sold 

• Materials

• Production

Operating expenses

• Co-working space

• Office supplies

• Marketing consultant

• Legal consultant

Net income or loss

• Total revenue and gains

• Total cost of goods sold (subtract)

• Total operating expenses (subtract)

• Pre-tax income (total of revenue and gains minus costs and expenses)

• State and federal income taxes (subtract)

• Net income or loss (pre-tax income minus taxes)

Simplify financial management with Rippling

Where do you find all the information needed to prepare financial statements like balance sheets, income statements, and the cash flow statement? Your general ledger. It details every transaction your company makes, from employee expenses to operational costs and tax payments. It’s a central repository that enables organizations to monitor their financial health and cash flow.

Rippling’s spend management software makes generating and managing critical financial documents a breeze. It consolidates all your finances—payroll, corporate cards, expenses, even benefits—and automatically syncs transactions to your general ledger. It’s a game-changer for your entire team: unprecedented control over spending and access to all your financial data to produce statements and reports that are accurate, up-to-date, and compliant. 

Since Rippling uses employee data to connect finance with the rest of your workforce management processes, company expense management policies will automatically apply to new employees as soon as they onboard and automatically adjust if they ever change roles.

Most "all-in-one" software consists of acquired systems. These modules are disconnected, so your business data is, too. Rippling takes a platform approach, building products on a single source of truth for all your business data, unlocking a powerful set of capabilities for your company.

FAQs about balance sheet vs. income statement

How does the time period differ between an income statement and a balance sheet? 

An income statement looks at company performance over a fixed period of time, like a month, quarter, or year. It reveals what your company earned, spent, and what’s left over. In contrast, a balance sheet is a snapshot of your financial position—assets, liabilities, and equity—at a specific point in time. This difference in timing is a key part of understanding the difference between a balance sheet and an income statement.

Which comes first, the balance sheet or the income statement?

Ah, the old chicken-and-egg question! When preparing your financial statements, start with your income statement. It shows your company’s revenue, expenses, and net income. You’ll need these figures to create other statements, including your balance sheet. 

Are salaries on the balance sheet?

Salaries appear as operating expenses on your income statement. But if payday lands after the reporting period and you still owe wages, that unpaid amount appears as a current liability called “salaries and wages payable” on your balance sheet. It’s a good example of what goes on a balance sheet vs. income statement—and how the timing of payments affects financial reporting.