Balance Sheet Versus Income Statement

A balance sheet differs from an income statement in terms of what it describes. An income statement covers a range or period of time such as a month or a year. An income statement describes how much money came into an organization during a period of time, how much went out as expenses, and what was left at the end of the period. A balance sheet is usually generated to show a snapshot of what an organization owns or owes on the last day of the period covered by the income statement. The balance sheet describes what the organization owns or owes to keep making or paying money during the next period of time covered by the next income statement.

As an analogy, say that two individuals tracked how much salary each brought in during the year and what expenses each had during that year. At the end of the year, these individuals find that they started with exactly the same salary, had exactly the same amount of money go out as expenses, and had exactly the same amount of money left as a net profit or loss at the end of the year. If you were to examine their balance sheets, however, you would find two very different pictures. Much more of the first person ‚ s expenses went toward buying stocks, bonds , and real estate. The second person ‚ s expenses went to into buying the latest fashions and taking lavish vacations . At the end of the year, the first person ‚ s investments paid off, consequently, he or she has much more in personal assets than in debts . The second person has less in assets and much more in debt.

The types of things that each person owns and owes are very different. Likewise, the proportion (or balance) of the amount each owns versus the amount each owes is very different. Finally, the first person is in a better position to make even more money in the next time period because his or her investments should help generate even more revenue. The second person is not in as good a position to bring in as much money next year. If the first person becomes unemployed, there is a cushion (some assets) to fall back on ‚ at least for a little while! The second person would be in a tough spot if he or she were laid off because there is no asset ‚“cushion ‚½ to weather a period of unemployment.

In essence, the income statement tells you how much money came in and how much went out. The balance sheet tells you what the money turned into. The statements are related but different. A good manager or a good WLP professional must understand both.

Figure 5-1 displays the financial position for the fictitious company, ABC MediCompany.

 

Figure 5-1: Sample balance sheet.