Understanding the Link between Balance Sheet and Income Statement

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Comparing a company’s balance sheet and income statement assures that the net income listed in the income statement is accurate. When utilizing the double entry method of accounting, the links between the two become clear. Revenues increase net income, while expenses decrease net income. Positive net incomes increase stockholders’/owner’s equity, as reported in the income statement. Negative net incomes decrease stockholders’/owner’s equity, as reported in the income statement. When transactions are recorded in the income statement, the balance sheet must also reflect these transactions.

When balance sheets and income statements are viewed side by side, it becomes easier to see the connections between the two. For example, the sales section of an income statement correlates with the cash and accounts receivable sections in the asset subheading in a balance sheet. Cost of goods sold affects inventory among assets and accounts payable in the liabilities subheading in a balance sheet.

Though balance sheets and income statements are separate documents, they should be reviewed together on a frequent basis. As stated before in previous articles, a balance sheet details financial information at a specific point in time, while an income statement details financial information over a certain duration of time. Therefore, comparing the two at frequent intervals will reveal any inconsistencies or irregularities between and among the statements.

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