Relationship Between Income Statement And Balance Sheet

Both Income Statement And Balance Sheet are the important Steps of Accounting Cycle and both are considered as important financial statements of the business and presented to the Users of Financial Statements.

Income Statement or Profit And Loss Account or Statement of Comprehensive Income shows the Financial Performance or Net Income / Net Profit or Net Loss of the business for a period while Balance Sheet or Statement of Financial Position shows Financial Position of the business on a particular time.

The Closing Balances of all the Assets, Liabilities and Equity or Owner’s Equity are transferred to Balance Sheet While all the Expenses And Revenues are transferred to Income Statement and from where Net Income / Net Profit or Net Loss is transferred to Liabilities & Equity Side Under Equity Section and added to the Equity or Owner’s Equity of the business.

So, Income Statement shows the Profitable Activities of the business of the owners of the Business i.e. Revenues - Expenses and it is added to Equity if there is Profit, otherwise it is deducted from it. While Balance Sheet represents the Accounting Equation as shown below:

Assets = Liabilities + Equity

How To Calculate Profit And Loss From Balance Sheet

The relationship or connection of Income Statement with Balance Sheet exits in the form of Accounting Equation i.e., all the incomes are added to Equity while all the expenses is subtracted from it and income statement does that job separately in the form of Revenues - Expenses in order to find out to Net Income / Net Loss for the period.

It is also to be noted that any Errors or Mistakes in Income Statement is shifted to Balance Sheet as the Net Income is added to the Equity on Balance Sheet.

Example: Mr. A is a Sole Owner of the Retail business. From the Financial Statement of his business, we find out that Opening Capital = 60000, Further Capital Introduced is Rs. 10000, Cash Withdraw for business for his own personal use (Drawings) is Rs. 5000 and Closing Capital is Rs. 70000, then find out Net Profit / Net Income for the accounting period.

We Know that:

Owner’s Equity / Closing Capital = Opening Capital + Further Capital Introduced + Net Income - Drawings - Closing Capital

                        70000      =  60000 + 10000 + Net Income - 5000

By simplifying, we get:

                   Net Income = Rs. 5000

So, there is strong relationship exits between Income Statement And Balance Sheet and both depends each other i.e. , if we ignore any one of them, the business will not run smoothly with stability and ultimately will fail at the end.