Question

Difference between annual accounts and balance sheet

Answer 1

Answer:

There are several differences between the balance sheet and income statement, which are outlined in the following points:

Timing. The balance sheet reveals the status of an organization's financial situation as of a specific point in time, while an income statement reveals the results of the firm for a period of time. For example, financial statements issued for the month of December will contain a balance sheet as of December 31 and an income statement for the month of December.

Items reported. The balance sheet reports assets, liabilities, and equity, while the income statement reports revenues and expenses that net to a profit or loss.

Metrics. The different line items in the balance sheet are compared to each other to derive the liquidity of a business, while the subtotals in the income statement are compared to sales to determine the gross margin percentage, operating income percentage, and net income percentage.

Uses - management. The balance sheet is used by management to determine whether a business has sufficient liquidity to meet its obligations, while the income statement is used to examine results, and find any operational or finance issues that are in need of correction.

Uses - creditors and lenders. Creditors and lenders use the balance sheet to see if a business is over-leveraged, which tells them if they should extend additional credit to the entity. They use the income statement to decide whether a business is generating a sufficient profit to pay off its liabilities.

Relative importance. The importance of the two reports varies by reader, but the general view is that the balance sheet is second in importance to the income statement, because the income statement reports the results of the enterprise