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Balance sheet vs. income statement
Profit and available cash answer different questions. Read the income statement for performance over a period, then look at the balance sheet to understand what the business owns, owes and has invested at the reporting date.
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General information, not legal or tax advice.
Read the period on the income statement
IRS Publication 583 describes an income statement as income and expenses over a given period. Before comparing results, confirm the reports cover comparable periods. A partial month beside a full month can create a misleading impression even when the underlying entries are correct.
Sources: IRS Publication 583, Starting a Business and Keeping Records
Use the balance sheet as a dated snapshot
The balance sheet shows assets, liabilities and business equity on a given date. Review cash, customer balances, unpaid obligations and owner balances together. An unfamiliar balance deserves a supporting schedule or explanation rather than an automatic correcting entry.
Sources: IRS Publication 583, Starting a Business and Keeping Records
Check the accounting basis before comparing
Under the cash method, income is generally reported when received and expenses when paid. Under accrual, income is generally reported when earned regardless of receipt. Ask your CPA which method applies to your tax reporting and keep that decision distinct from how you want to examine management reports.
Sources: IRS Publication 538, Accounting Periods and Methods (Rev. January 2022)
Investigate what changed in the business
Compare income and expense categories with the work performed during the period. Then ask whether collections, unpaid bills or owner transfers explain movements in the bank balance. These are practical review questions, not a substitute for tracing a transaction to its supporting record.
Turn report questions into a close list
The IRS identifies monitoring business progress and preparing financial statements as reasons to keep good records. Maintain a short list of unexplained balances, missing documents and coding questions. Resolve those items before handing the reports to a lender or your CPA.
Sources: IRS Recordkeeping
Sources: financial statement reading
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