Question

How are the Balance sheet and Income statement related? Discuss the pattern of information flow between these two documents.

Answer 1

Answers 1. The connection between the Balance sheet and Income Statement results from: The use of Double Entry Accounting on. Bookkeeping, and The Accounting Equation Assets = Liabilities & owner's Equity Basically the income statement components have the following effects on owner's Erinity: o revenues and Grains cause owner's (or shackholders) equity to increase. • Excpenses and losses.cause owner's for stockholders) Equity to Decrease. -

. Example of How the balance sheet and Income statement are connected . To illustrate the connection between the balance Sheet and Income statement, let's assume that a company owner's equity was shooooo at the beginning of the year, and it was $65.000 at the end of the year. Let's also assume that the owney did not invest or withdraw business assets during the year. Therefore, the $25,000 increase in owner's Equity is likely the company's net income earned for the year. The details for the $25.000 (revenues, I expenses, gains, losses) will be reported on the company Income statement for the year. Accountants reper to the Income statement accounts (tevenues, expenses, gains, losses) as temporary accounts because their balances will be closed anó tanstetted to the owner's capital account at the end of the year

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