Key Difference – Balance Sheet vs Cash Flow Statement
It is important to measure and record the company performance in order to evaluate the results and arrive at decisions for the future. Such information is reported to relevant stakeholders through year-end financial statements. Balance Sheet and Cash Flow Statement are two of the main financial statements that investors and other stakeholders increasingly rely on. The key difference between balance sheet and cash flow statement is that a balance sheet shows the assets, liabilities, and equity of the business as at a particular point of time whereas a cash flow statement shows how movements in assets, liabilities, income and expenses affect the cash position.
What is a Balance Sheet?
Balance Sheet, also known as the Statement of Financial Position, is a statement prepared by companies that show the assets, liabilities, and equity of the business as at a particular point of time and is used by various stakeholders to arrive at decisions regarding the company. Balance Sheet of listed companies should be prepared according to accounting principles and a specific format.
Accounting Concepts used during the preparation of a Balance Sheet
- Realization Concept/ revenue recognition concept
Revenue should be recognised when it is earned.
- Matching Concept
All expenses incurred during the accounting period with the revenues recognised during the same period.
Costs are recognised when they are incurred, not when paid; revenue is recognised on its realisation and not on receipt of payment.
Specific information on certain transactions and any additional information should be included as notes at the end of the balance sheet. These notes can include any information that will be useful for users of the statement. Common information in notes are, items not included in the balance sheet, supplementary information and summary of significant accounting policies.
Format of the Balance Sheet
What is a Cash Flow Statement?
Cash is one of the most important assets to a company for the smooth flow of routine operation and is the most liquid. Liquidity is vital for both survival and long-term profitability of the business. Unlike in a balance sheet, the transactions in the cash flow statement are recorded upon a cash receipt or a payment.
There are 3 main types of activities recorded in the Cash Flow Statement
Cash flow from Operating Activities
This section records the cash resulting from routine operational activities
E.g. Sale of goods, cash received from debtors
Cash flow from investing activities
Cash flow resulting from purchase or sale of assets are recorded as investing activities
E.g. Cash received from sale of plant and equipment, short-term borrowings
Cash flow from financing activities
In this section of the statement, the cash inflow and outflow received from investors are recorded
E.g. Interest paid on loan, dividend paid
Format of the Cash Flow Statement
Once the cash balance is identified, the company can make decisions regarding the management of cash. If there is a cash surplus (positive cash balance), short-term investments can be considered to earn extra income. If there is a cash deficit (negative cash balance) there is a need to consider borrowing funds in order to continue operations in a smooth manner.
What is the difference between Balance Sheet and Cash Flow Statement?
Balance Sheet vs Cash Flow Statement
|A balance sheet is prepared to reflect the financial position at a single point of time.||A cash flow statement is prepared to reflect the cash movement over the financial year.|
|There are movements in assets, liabilities and equity.||There are movements in cash.|
|This is an accrual basis accounting.||This is a cash basis accounting.|
“Popular Concepts of Accounting (10 Concepts).” YourArticleLibrary.com: The Next Generation Library. N.p., 22 Apr. 2015. Web. 02 Feb. 2017.