Comparison between a Balance Sheet and an Income Statement Essay

Comparison between a Balance Sheet and an Income Statement - Essay Example A balance sheet follows the general structure of Assets = Liabilities + Owners’ Equity, which means that the summation of all assets must equal the liabilities and shareholders’ equity. Investors and company management need this information to determine the current value of a company. An income statement, like the balance sheet, shows the value of the company because it shows whether the company is operating at a loss or at a profit. An income statement portrays a company revenues vis a vis the expenses, gains, and losses after taxation for a specific period of time, be it annually, monthly, quarterly, or semiannually. Although the two financial statements are two different statements, they are closely related in that, a company’s profit and loss statement directly affect the shareholders’ equity. In the event that a company posted $30,000 increase owner’s equity compared to the previous year and the owner did not invest or withdraw assets from the business, then the increase represents the net income for the year. If the owner had withdrawn $15,000 in assets for personal use, then the net income must have been $45,000 to produce the $30,000 increase in shareholders’ equity. A balance sheet is more useful in determining the sustainability of a company as it outlines a company’s assets in comparison to the liabilities. The relationship between a balance sheet and an income statement is a result of the double entry system that prescribes Assets = Liabilities + Owner’s Equity.