The Relationship Between Income Statement and Balance Sheet
It Helps in Filing Financial Statements
Businesses are required to file their financial statements with the Registrarof Companies. Listed entities are required to file them with stock exchanges,as well as for direct and indirect tax filing purposes. Needless to say,accounting plays a critical role in all these scenarios.
Categorizing balance sheet and income statement accounts
General ledger accounts post to the balance sheet or the income statement.These categories stay in place, regardless of the business’s accountingmethod.
Balance sheet accounts
Balance sheet accounts are permanent accounts. The balances in these accountsare reported on the balance sheet and carry over from one period to the next.Balance sheet accounts include: * Asset accounts (cash, accounts receivable, etc.) * Liabilities (accounts payable, loans payable, etc.) * Equity accounts
Income statement accounts
Income statement accounts are temporary accounts. These balances are closed atthe end of each month, so the next month begins with a zero balance. Incomestatement accounts include: * Revenue (sales, investment income, etc.) * Expenses (salaries expense, rent expense, interest expense, etc.) The chart of accounts is a list of all of the accounts used to recordtransactions. The number of accounts in the chart of accounts may be greaterthan the number of accounts in the general ledger. Accounts with zero balancesor no recent entries are often omitted from the general ledger. But they willstill appear on the chart of accounts.
3. Start the balance sheet
With the top of the income statement in place, you can start to fill in thebalance sheet. Begin by calculating accounts receivable and inventory, whichare both functions of revenue and COGSAccountingOur Accounting guides andresources are self-study guides to learn accounting and finance at your ownpace. Browse hundreds of guides and resources., as well as the AR days andinventory days assumptions. Next, fill in accounts payable, which is afunction of COGS and AP days.
5. Complete the income statement and balance sheet
The information from the supporting schedules completes the income statementand balance sheet. On the income statementIncome Statement TemplateFree IncomeStatement template to download. Create your own statement of profit and losswith annual and monthly templates in the Excel file, link depreciation to thePP&E schedule and interest to the debt schedule. From there, you can calculateearnings before tax, taxes, and net income. On the balance sheet, link theclosing PP&E balance and closing debt balance from the schedules.Shareholder’s equityStockholders EquityStockholders Equity (also known asShareholders Equity) is an account on a company’s balance sheet that consistsof share capital plus can be completed by pulling forward last year’s closingbalance, adding net income and capital raised, and subtracting dividends orshares repurchased.
6. Build the cash flow statement
With the income statement and balance sheet complete, you can build the cashflow statement with the reconciliation method. Start with net income, add backdepreciation, and adjust for changes in non-cash working capital, whichresults in cash from operations. Cash used in investing is a function ofcapital expendituresCapital ExpendituresCapital expenditures refer to fundsthat are used by a company for the purchase, improvement, or maintenance oflong-term assets to improve in the PP&E schedule, and cash from financing is afunction of the assumptions that were laid out about raising debt and equity.
What Goes on an Income Statement vs. Balance Sheet?
The income statement and the balance sheet report on different accountingmetrics related to a business’s financial position. By getting to know thepurpose of each of the reports you can better understand how they differ fromone another.
How Do You Prepare a Balance Sheet from an Income Statement?
A business’s financial statements are all interconnected and they report someof the same information, but for different purposes. Because some of yourfinancial statements draw from data reported on other statements, there’s aparticular order you should follow when preparing them, which is: 1. Income Statement 2. Balance Sheet 3. Cash Flow StatementTo prepare a balance sheet, you need to calculate net income. Net income isthe final calculation included on the income statement, showing how muchprofit or loss the business generated during the reporting period. Once you’veprepared your income statement, you can use the net income figure to startcreating your balance sheet.On the balance sheet, net income appears in the retained earnings line item.Net income affects how much equity a business reports on the balance sheet.
The Relationship Between Income Statement and Balance Sheet
In double-entry bookkeeping, the income statement and balance sheet areclosely related. Double-entry bookkeeping involves making two separate entriesfor every business transaction recorded. One of these entries appears on theincome statement and the other appears on the balance sheet.Every time a sale or expense is recorded, affecting the income statement, theassets or liabilities are affected on the balance sheet. When a businessrecords a sale, its assets will increase or its liabilities will decrease.When a business records an expense, its assets will decrease or itsliabilities will increase. In this way, the income statement and balance sheetare closely related. Dummies.com put together this helpful illustrationdemonstrating just how closely the two reports tie together:
The Difference Between an Income Statement and Balance Sheet
The income statement and balance sheet report different financial accountinginformation about your business. The key differences between the two reportsinclude:Line Items Reported: The income statement reports revenue, expenses and profitor loss, while the balance sheet reports assets, liabilities and shareholderequity.Timing: The income statement reports on financial performance for a specifictime range, often a month, quarter or year. The balance sheet reports onfinancial activity for one specific date.Metrics: The line items on the income statement are compared to the salesfigure to find your company’s gross margin, operating income and net income,as percentages. The line items on the balance sheet can be used to understandthe liquidity of your business.
Sample Income Statement
This sample income statement from Accounting Coach shows the different figuresused to calculate net income, the layout of the report and how it differs froma balance sheet: