How to Adjust Entries That Do Not Affect the Income Statement
The financial statements of a business include the profit and loss statement, sometimes referred to as an income statement, and the balance sheet. Balance sheet entries do not affect income or expenses and do not appear on the income statement. Balance sheet entries include items such as purchases of equipment, furniture, autos and real estate, as well as entries recording loans or notes and accounts payable. Any entry regarding sales or direct expenses such as rent, advertising or business supplies will affect the income statement.
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Instructions
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Record balance sheet adjustments to assets by debiting assets or crediting assets. For example, if you receive a non-sales increase in cash from a loan, you would debit cash -- make an entry to increase cash. If you make a withdrawal that is not for a business expense, credit (or decrease) cash on your books. This will not affect the income statement.
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Record any increase in liabilities such as a note payable by crediting or increasing notes payable. For example, if your business takes out a loan, make an entry to credit loans payable. This means you will increase the amount you show on your books for loans. Likewise, if you pay off a business loan, make an entry to debit or decrease loans payable so the balance you owe will be reduced. These entries will not affect the income statement.
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Review any balance sheet entries with your accountant to verify that the entry does not affect the income statement. Any increase or decrease in the income statement could affect your business tax liability.
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Tips & Warnings
Sometimes a transaction relating to a balance sheet item such as the payment on a loan will affect both the balance sheet and income statement. This is because a loan payment includes both principal and interest. When you make a loan payment, you'll be decreasing the amount you owe on the loan, and also increasing your interest expense shown on the income statement.
