Sample Balance Sheet and Income Statement for Small Business
By examining a sample balance sheet and income statement, small businesses can better understand the relationship between the two reports. Every time a company records a sale or an expense for bookkeeping purposes, both the balance sheet and the income statement are affected by the transaction. The balance sheet and the income statement are two of the three major financial statements that small businesses prepare to report on their financial performance, along with the cash flow statement.
These topics will show you the connection between financial statements and offer a sample balance sheet and income statement for small business:
What Goes on an Income Statement vs. Balance Sheet?
The income statement and the balance sheet report on different accounting metrics related to a business’s financial position. By getting to know the purpose of each of the reports you can better understand how they differ from one another.
What Goes on an Income Statement?
An income statement, also called a profit and loss statement, lists a business’s revenues, expenses and overall profit or loss for a specific period of time. An income statement reports the following line items:
- Sales: Revenue generated from the sale of goods and services
- Cost of Goods Sold: Including labor and material costs
- Gross Profit: The cost of goods sold subtracted from sales
- General and Administrative Expenses: Includes rent, utilities, salary, etc.
- Earnings Before Tax: Your business’s pre-tax income
- Net Income: The total revenue minus total expenses, which gives the profit or loss
The end goal of the income statement is to show a business’s net income for a specific reporting period. If the net income is a positive number, the business reports a profit. If it’s a negative number, the business reports a loss.
What Goes on a Balance Sheet?
A balance sheet reports a business’s assets, liabilities and equity at a specific point in time. A balance sheet is broken into two main sections: assets on one side and liabilities and equity on the other side. The two sides must balance out, meaning they should be equal to one another. It reports the following line items:
- Current Assets: Assets that will be converted to cash within a year, including accounts receivable, inventory and prepaid expenses
- Long-Term Assets: Assets that won’t be converted to cash within a year, including land, buildings and equipment
- Current Liabilities: Debts owed within a year, including rent, utilities, taxes and payroll
- Long-Term Liabilities: Long-term business loans, pension fund liabilities
- Shareholders Equity: A business’s net assets, including money generated by the business and donated capital
The balance sheet tells you what your business owns and what it owes to others on a specific date. It gives a snapshot of the business’s overall worth.
How Do You Prepare a Balance Sheet from an Income Statement?
A business’s financial statements are all interconnected and they report some of the same information, but for different purposes. Because some of your financial statements draw from data reported on other statements, there’s a particular order you should follow when preparing them, which is:
- Income Statement
- Balance Sheet
- Cash Flow Statement
To prepare a balance sheet, you need to calculate net income. Net income is the final calculation included on the income statement, showing how much profit or loss the business generated during the reporting period. Once you’ve prepared your income statement, you can use the net income figure to start creating your balance sheet.
On the balance sheet, net income appears in the retained earnings line item. Net income affects how much equity a business reports on the balance sheet.
The Relationship Between Income Statement and Balance Sheet
In double-entry bookkeeping, the income statement and balance sheet are closely related. Double-entry bookkeeping involves making two separate entries for every business transaction recorded. One of these entries appears on the income statement and the other appears on the balance sheet.
Every time a sale or expense is recorded, affecting the income statement, the assets or liabilities are affected on the balance sheet. When a business records a sale, its assets will increase or its liabilities will decrease. When a business records an expense, its assets will decrease or its liabilities will increase. In this way, the income statement and balance sheet are closely related. Dummies.com put together this helpful illustration demonstrating just how closely the two reports tie together:
The Difference Between an Income Statement and Balance Sheet
The income statement and balance sheet report different financial accounting information about your business. The key differences between the two reports include:
Line Items Reported: The income statement reports revenue, expenses and profit or loss, while the balance sheet reports assets, liabilities and shareholder equity.
Timing: The income statement reports on financial performance for a specific time range, often a month, quarter or year. The balance sheet reports on financial activity for one specific date.
Metrics: The line items on the income statement are compared to the sales figure to find your company’s gross margin, operating income and net income, as percentages. The line items on the balance sheet can be used to understand the liquidity of your business.
Sample Income Statement
This sample income statement from Accounting Coach shows the different figures used to calculate net income, the layout of the report and how it differs from a balance sheet:
Sample Balance Sheet
This sample balance sheet from Accounting Coach shows the line items reported, the layout of the document and how it differs from an income statement: