How Do Items on an Income Statement Affect a Balance Sheet?

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How Do Items on an Income Statement Affect a Balance Sheet?
How Do Items on an Income Statement Affect a Balance Sheet? (Image: http://en.wikipedia.org/wiki/income_statement,http://en.wikipedia.org/wiki/balance_sheet)

Assets

Anything valuable that a company owns is an asset on the balance sheet. With the exception of inexpensive goods consumed during the accounting period. Some examples of inexpensive goods a company uses are printer paper or paper clips. Assets are usually in use by employees each day to provide services or make products, such as vehicles, equipment, inventory, and the physical building if owned by the company. The company can sell or dispose of assets and usually receive money, which is also an asset. Intangible items such as trademarks and patents are assets. When a company disposes of an asset, you will see a reduction in assets on the balance sheet and an increase in cash. If the company received more for the asset than its book value, that amount will show up on the Income Statement under "Other Income." If the company received less than book value for the asset, the amount may be under "Other Expenses." Unless the change in book value was rolled over into a new asset replacing the old asset, the change in assets will affect the company's net income on the income statement. Net income on the income statement will affect the owner's equity on the balance sheet.

Balance Sheet for a small business
Balance Sheet for a small business

Liabilities

When liabilities change on the balance sheet, you will see changes in revenues and expenses on the income statement, causing either gains or losses for the company. In turn, gains and losses on the income statement affect owners equity on the balance sheet. Liabilities on the balance sheet are debts, when a company owes money to banks, suppliers, proprietors, employees for payroll, and taxes owed to the government. A provision for income taxes is also on the Income statement.

Owners' Equity

The owner's equity is the same as shareholders' equity and it is on the balance sheet. The balance sheet, just as the income statement is published monthly, quarterly and yearly to show the company's financial position on that date. If the company liquidated, sold everything, and paid its liabilities, the owner's equity should remain and be distributed among owners or shareholders. A company's profit or loss reflected on the income statement will change the owner's equity amount on the balance sheet.

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