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Chapter 5. Position > Balance Sheet Versus Income Statement

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.


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