As a company owner, you need to comprehend the relationship between the financial statements (Also see Introduction to Financial Statements) so that you can analyse your company’s financial status effectively. The financial statements appear in various pages of the company annual report, and the connections between the statements are not clearly stated. Hence, let’s discover the relationship between the income sheet and the balance sheet. (Also see Basics on Balance Sheet )
You will see the relationship between the income statement and the balance sheet when recording an expenditure or a sale using double-entry accounting. (Also see What is Double-Entry Bookkeeping?) In double-entry accounting, if sales increase, liability will decrease or assets will increase, whereas costs will reduce assets or increase liability.
This suggests that one side of every sale entry or expenditure is recorded in the balance sheet, and the other side is recorded in the income statement. Thus, the income statements and the balance sheet are inseparable but reported individually.
To comprehend the relationship between an income statement and a balance sheet, think about the following.
- Your company requires to keep a working cash balance if you make sales and incur expenses in making the sales.
- Credit sales that are recorded in the income statement creates accounts receivables (Also see What are Trade Receivables and Non-trade Receivables?) in the balance sheet.
- To make sales (which is recorded in the income statement), your company should have inventory (which is recorded in the balance sheet).
- To obtain inventory, you need to buy goods on credit and this produces account receivable.
- Depreciation is recorded in the balance sheet and also in the accumulated depreciation contra account in the income statement.
The operating expense (which is recorded in the income statement) is a broad category selling, general expenses and administrative. These expenses appear in many accounts in the balance sheet, such as the accrued expenses account, accounts payable, and more.
From the relationship between the income statement and the balance sheet, we know that every income or expense recorded in the income statement appears in the balance sheet. Therefore, here is a new question, is the income statement the same as the balance sheet?
A balance sheet shows the company finances at one particular time. It consists of three reports that are liabilities, assets and owner’s equity. On the other hand, the income statement reveals all of your company’s incomes and expenses. Its primary goal is to determine the cash flow generated or lost by your company in a given duration.
If you are still uncertain about the relationship between the income statement and the balance sheet, please seek guidance from accounting service in Singapore .