Question

what is the relationship of an income statement to a balance sheet explain your answer with an example

i want detailed answer

Answer 1

Income Statement

An profits statement, additionally known as a income and loss statement, lists a business’s revenues, charges and standard income or loss for a particular duration of time. An income statement reports the following line items:

• Sales
• Cost of Goods Sold
• Gross Profit
• General and Administrative Expenses
• Earnings Before Tax
• Net Income

The give up aim of the earnings announcement is to exhibit a business’s internet profits for a particular reporting period. If the net income is a positive number, the business reports a profit. If it’s a negative number, the business reports a loss.

There are two formats for presenting a company's income statement:

• Multiple-step
• Single-step

The difference in formats has to do with the number of subtractions and subtotals that appear on the income statement before getting to the company's bottom line net income.

Balance sheet

A balance sheet reports a business’s assets, liabilities and equity at a specific point in time. A balance sheet is broken into two main sections: assets on one side and liabilities and equity on the other side.

It reports the following line items:

• Current Assets
• Long-Term Assets
• Current Liabilities
• Long-Term Liabilities
• Shareholders Equity

The balance sheet tells you what your business owns and what it owes to others on a specific date. It gives a snapshot of the business’s overall worth.

Relationship

In double-entry bookkeeping, the income statement and balance sheet are closely related. Double-entry bookkeeping involves making two separate entries for every business transaction recorded. One of these entries appears on the income statement and the other appears on the balance sheet.

Every time a sale or expense is recorded, affecting the income statement, the assets or liabilities are affected on the balance sheet. When a business records a sale, its assets will increase or its liabilities will decrease. When a business records an expense, its assets will decrease or its liabilities will increase. In this way, the income statement and balance sheet are closely related.

The Income statement accounts are temporary account due to the fact their balances will be closed at the cease of every accounting yr to the stockholders' equity account Retained Earnings.
The hyperlink between the balance sheet and income statement is beneficial for bookkeepers and accountants who desire some assurance that the quantity of net income acting on the income statement is correct.

Example

Company equity capital was $60,000 at the beginning of the year, and it was $90,000 at the end of the year. The owner did not invest or withdraw business assets during the year. Therefore, the $90,000 increase in equity capital is the company's net income for the year. The details for the $30,000 is net of revenues, expenses, gains, losses, will be reported on the company's income statement for the year.