Your annual accounts arrive, and you find two statements telling different stories. The balance sheet shows your business’s financial position at a specific date. The income statement explains what it earned or lost over a period. Read them together to understand your finances.
At a glance
- The balance sheet reports assets, liabilities and equity at the reporting date.
- The income statement brings together income and expenses for the financial year.
- Profit increases equity before other movements, including distributions.
- Profit is not cash available in the bank. Customer payments, investments and financing create differences.
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Two statements, two questions
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| Comparison | Balance sheet | Income statement |
|---|---|---|
| Question answered | What is the financial position? | What profit or loss did the business generate? |
| Time reference | A date, such as 31 December | A period, such as 1 January to 31 December |
| Contents | Assets, liabilities and equity | Income and expenses |
| Examples | Bank, receivables, equipment and loans | Sales, wages, rent and depreciation |
| Main insight | Resources and how they are financed | Performance over the financial year |
A balance sheet is often compared to a photograph. That is helpful, provided you remember that a photograph does not show every upcoming payment deadline. The income statement does not describe all cash movements either.
What does the balance sheet contain?
Assets include cash, trade receivables, inventories and non-current assets. The financing side contains liabilities, meaning amounts owed, and equity. In a French-language Swiss balance sheet, passif refers to this entire financing side, not just liabilities.
The correct equation is: assets = liabilities + equity. Because equity is included in the financing side, the totals on the two sides are equal.
Explore the detailed balance sheet structure and our approach to reading and analysing its items (in French).
What does the income statement contain?
The income statement starts with income, including revenue, and takes into account the year’s expenses: goods consumed, staff, rent, depreciation, financing and other relevant items.
The difference is a profit or loss. For a company, net profit includes corporate income tax. A sole proprietor’s personal income tax is not treated like an LLC’s corporate tax.
Income and expenses must be allocated to the correct period under the applicable rules. An invoice paid in January may relate to the financial year ending in December.
Why do profit and the bank balance differ?
Here are three common situations:
- A service has been delivered and invoiced, but the customer has not paid. Income may be recognised and a receivable recorded in the balance sheet, without any cash receipt.
- A machine is purchased. Payment reduces cash at bank, while the asset’s cost is capitalised and then depreciated under the applicable policy.
- A loan is repaid. Repayment of principal reduces cash and the liability; only interest and other relevant charges affect profit.
To anticipate payments, supplement these statements with a cash flow forecast (in French). To monitor performance, compare your profit margins and expenses across several periods.
Three transactions with different effects
These examples are independent of one another and deliberately exclude VAT.
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| Transaction | Effect on the balance sheet | Effect on profit | Effect on cash at bank |
|---|---|---|---|
| CHF 20,000 loan received | Bank +20,000; liability +20,000 | None | +20’000 |
| CHF 6,000 service delivered but unpaid | Receivable +6,000; profit/equity +6,000 before expenses and tax | Income +6,000 | None |
| CHF 4,000 depreciation charge | Net asset value −4,000; profit/equity −4,000 before tax | Expense +4,000 | None |
An amount appearing in the balance sheet is therefore not necessarily income or an expense of the year.
Interpretation mistakes to avoid
A balanced balance sheet can still belong to a business in financial difficulty. Conversely, an arithmetic imbalance in a table does not, by itself, establish overindebtedness. That requires a specific legal and accounting assessment.
Do not compare a full year with a few months of trading without adjustment. Read thenotes to the financial statements (in French), check changes in accounting policies and identify unusual transactions before drawing conclusions.
Read the statements together to manage your business
The balance sheet explains your business’s financial position; the income statement explains its performance over a period. Bringing them together, and adding cash flow monitoring, helps you understand the relationship between sales, debts and the bank account.
Want to turn these statements into useful decision-making information? Our accounting support helps you maintain reliable accounts and interpret them, both at year-end and throughout the year.
Frequently asked questions
Is the Swiss compte PP an income statement?
Yes. PP means pertes et profits, the French term for profit and loss commonly used in Switzerland.
Which statement should I read first?
You can start with the income statement to understand performance, then review the balance sheet to assess resources and financing. If finances are under pressure, look at cash and payment deadlines first.
Can a profitable business run short of cash?
Yes. Accounting profit can be tied up in receivables, inventories or investments. That is why cash flow monitoring remains essential.
Sources and references
Romain Prieur is a Swiss-qualified accountant and founder of Entreprendre.ch. With more than ten years of experience in audit and business advisory in Switzerland, he advises entrepreneurs on company formation, accounting and taxation.
How does profit connect to the balance sheet?
A business has CHF 40,000 in equity at the start of the year. It earns a profit of CHF 10,000. With no capital contributions, distributions or other movements, equity reaches CHF 50,000 at year-end.
That profit therefore appears in the income statement and forms part of equity in the balance sheet. Wealth has not been created twice: the statements show two aspects of the same business activity.
If the shareholders later approve a dividend, the distribution reduces equity. It is not an operating expense that reduces profit a second time.