Difference Between Balance Sheet and Cash Flow Statement

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.

CONTENTS
1. Overview and Key Difference
2. What is a Balance Sheet
3. What is a Cash Flow Statement
4. Side by Side Comparison – Balance Sheet vs Cash Flow Statement

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.

• Accrual Concept

Costs are recognised when they are incurred, not when paid; revenue is recognised on its realisation and not on receipt of payment.

Notes

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?

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