Why The Three Financial Statements Are Linked Together

How The Three Financial Statements Are Linked Together?

The three Financial Statements such as Income Statement, Statement of Owner’s Equity, in case of Sole Proprietorship and Partnership or Statement of Retained Earnings in case of Company or Corporation, and Statement of Financial Position (Balance Sheet) are linked together because the Net Income / Net Profit or Net Loss calculated from income statement is transferred to statement of owner’s equity or statement of retained earnings and then owner’s equity or equity is trasferred to balance sheet.

So, any mistake or error or fraud in these financial statement is automatically transferred to all of these financial statements as these financial statements are linked with each other.

For example, the net income of Rs. 10000 of a sole proprietor’s business for the period is transferred to statement of owner’s equity account where it is added to the opening capital in order to calculate the closing capital which is transferred to balance sheet under the owner’s equity section of liabilities and owner’s equity side.

These three financial statements along with Statement of Cash Flows are included in the Steps of Accounting Cycle.