Balance Sheet and Income Statement defintion

A little introduction to a balance sheet and income statement 

When your mom and dad earn money from their jobs or their business, it is important for them to know how much money they have coming in each month so that they know how much they can spend. Once money has been set aside for important things like food and bills, whatever is left over can be invested. Often grownups will try to save as much money as they can. They will keep track of all of their money using a balance sheet and income statement. The objective is to grow their balance sheet and income statements


A balance sheet

Assets and Liabilities - what are they

Assets and Liabilities – what are they

is a list which includes all of a person’s assets and liabilities. As mentioned in your vocabulary section, assets can be thought of as valuable things which a person owns, including money. Sometimes somebody will buy something because it will be worth more in the future. This is called an investment, and it is also an asset. A liability is listed on a person’s balance sheet when they owe money.


An income statement is a little bit different. Whereas a balance

Income Statement shows income less expenses

Income Statement shows income less expenses

statement will show the total amount of money a person has at a point in time, an income statement will show how much money is coming in and how much money is going out each month. Money coming in will include the wages from a job or income from selling something.The main objective you should have in mind is to grow your income. An income statement will also show all of the money which is spent during a month. This will include payments for things like bills, food, clothes, and petrol for the car. These payments are called expenses.


There are different categories on a balance sheet to help people to keep track of their money. For example, a person’s assets will be split up into different types. Their cash assets will be all of the money they have in their savings and checking accounts. Real estate assets would be included if a house had been bought and if a loan was used to purchase the house then a loan would appear in the liability side of the balance sheet.  Paper assets would include any shares, stocks or bonds which were owned. Other assets would include anything else which is valuable, for example if a person owned gold coins.

Grownups will use their income statements to know how much money they are spending and saving each month, and their balance sheet to know how much money they have in total. By making sure that their income statements show that they have extra money they can use the excess money to  build a strong  balance sheet. It can take a long time to have a strong balance sheet, which is why it is important to start as early as possible. If you start your income statement and balance sheet when you’re a kid, then by the time you’re a grown up you can have lots of valuable assets.

What you owe and what you own

What you owe and what you own