You can't calculate sales from a balance sheet, although you can use balance sheet information to get a sense of how past sales have played out in your present overall financial situation. Your balance sheet shows your company's financial standing on a particular day, including how much you own, how much you owe and how much you would have left over if you could successfully liquidate all of your assets and pay off all of your debts.
Although you can't exactly see sales in a balance sheet, you can get a general idea of how sales are trending by comparing balance sheets from different periods.
Your income statement shows how much your business has received for its products and services during a specific period of time and how much you have spent to generate this revenue. It breaks your income into categories such as wholesale and retail sales and also groups your expenditures by type such as materials, labor, rent, utilities, interest and taxes. The bottom of your income statement subtracts your total deductible expenses from your total revenue, showing how much profit you have left over at the end of the day.
Your balance sheet summarizes your financial situation by listing and aggregating your assets and liabilities. If your sales have been high and your expenses have been low, you'll most likely have assets to show on your balance sheet. They may take the form of cash in the bank or major equipment investments, but either way, your balance sheet shows that you have something to show for your work and sales.
You can't see purchases in your balance sheet any more than you can see specific sales numbers. However, if your purchases are stored as inventory, they'll be part of your inventory asset, and if you've purchased infrastructure improvements, you'll see the effects of these transactions in the equipment figure that also shows up on the asset side of the statement.
Say your business has generated $5,000 more than you spent over the past year, and you had no cash and no equipment at the beginning of the year. You invested $3,000 in a new piece of equipment, and you have $2,000 left over, which you are holding in the bank for working capital. Your balance sheet at the end of the period might look like this, showing how you spent the $5,000 by which your sales exceeded your expenditures.
- Cash on hand: $2,000
- Inventory: $800
- Accounts receivable: $400
- Equipment $3,000
- Total Assets: $6,200
- Term loans: $2,500
- Accounts payable: $1,200
- Outstanding payroll: $600
- Owner's equity (assets minus liabilities): $1,900
- Total liabilities: $6,200
The correlations between your income statement and balance sheet should be reasonably straightforward. After all, your balance sheet reflects your financial situation, which is a direct result of the profit or loss reflected on your income statement. In actuality, however, your income statement and balance sheet interact in a variety of complex ways depending on the short-term and long-time choices you have made about how to spend and save your money.
Depreciation is an example of a financial event that shows up differently on these separate financial statements. When you buy a major piece of equipment, it will not show up all at once on your income statement even though the money may have left your bank account in one lump sum. Instead, tax reporting conventions require you to establish a time frame for the useful life of your investment, such as five years, and then claim one-fifth of the cost as an expenditure for each of the next five years.
Your balance sheet may show that a piece of equipment depreciated over the amount of time since you purchased it, while the cash balance on your balance sheet will reflect the fact that you spent the money on the equipment, and you no longer have it on hand. The relationship between the ways this expenditure is handled on each of these financial statements certainly isn't arbitrary, but it can be tricky to untangle.