Ever wonder how the Balance Sheet and Income Statement are related?

A balance sheet and an income statement (also called a Profit and Loss or P&L) are both financial statements that provide information about a business. The balance sheet provides a snapshot of a business’s financial position at a specific point in time, while the income statement provides information about a business’s financial performance over a period of time, such as a month or a year.

The balance sheet shows the assets, liabilities, and equity of a business at a specific point in time. Assets are resources owned by the business that have monetary value, such as cash, investments, and inventory. Liabilities are obligations or debts that the business owes to others, such as loans and accounts payable. Equity represents the residual interest in the assets of the business after liabilities are subtracted. The balance sheet must balance, meaning that the total value of assets must equal the sum of liabilities and equity.

The income statement shows the revenues, expenses, and net income (or loss) of a business over a period of time. Revenues are the amounts earned by the business from the sale of goods or services. Expenses are the costs incurred by the business in order to generate revenues, such as cost of goods sold, selling and administrative expenses, and interest expense. Net income is calculated by subtracting expenses from revenues.

The balance sheet and income statement are related because the net income or loss shown on the income statement for a given period of time will affect the equity section of the balance sheet. If the business has a net income, it will increase the equity in the business. If the business has a net loss, it will decrease the equity in the business.

In summary, the balance sheet provides information about a business’s financial position at a specific point in time, while the income statement provides information about a business’s financial performance over a period of time. The balance sheet and income statement are related because the net income or loss shown on the income statement will affect the equity section of the balance sheet.