How does the income statement affect the balance sheet?
How does the income statement affect the
Balance Sheet:
It is also termed as the Statement of Financial Position. Balance Sheet represents a picture of the company's assets, debts, and ownership on a given day. It is considered less reliable than an income statement. In other words, it presents the financial position of a business organization at a given date.
It is based on the accounting equation where, Assets = Liabilities + Equity
Assets: Assets refer to the things which the company owns during the accounting period. Assets include Current Assets like cash, accounts receivables, inventories, etc., and Non-Current Assets like Building, Machinery, etc.
Liabilities: Liabilities refers to the items which the company owes during the accounting period. Liabilities include Current and Non-Current Liabilities. Current Liabilities include expenses payable, accounts payable, short-term loans, etc. Non-Current Liabilities include, Long-Term Loans, Notes Payable, Bond Payable, etc.
Equity: Equity includes the amount of money invested by the owner or stockholders of the institution, it also includes the past income or loss of the company which has not been withdrawn or distributed by the owner. It can be represented as with the formula as under:
Stockholders' Equity = Share Capital/Common Stock + Retained Earnings
Retained Earnings = Net Income - Dividend
Income Statement:
The income statement reports the financial performance in terms of profit or loss accounts for a specific accounting period. It is computed by subtracting the total expenses from the total revenue earned during the accounting period as required. It can be prepared in two formats, Single-Step Income Statement or Multi-Step Income Statement.
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