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

Video Transcript

"Hi, I'm Miranda Chook, a CPA. We're going to talk about how some of the major items on an income statement affect the balance sheet. So hopefully, one of the largest numbers on an income statement is the revenue number or sales, or if you're looking at a bank's financial statements it'll be net interest income. So, in its simplest form is basically cash in or accounts receivable if the company is allowing its customers to pay over time. And then of course, the other side is sales. So, when you look on the balance sheet you should see cash and accounts receivable increase, but they won't increase the exact amount because a company will be reinvesting those those cash proceeds; perhaps by building more factories, or machinery, or even by paying dividends, so you may see fixed assets increase or you may see the dividend lined increase. Now, a slight complication as well is that you may see something called allowance for doubtful accounts that is related to accounts receivable increase as well, and hopefully it's not increasing by a faster rate. But again, all that means is that there are some customers that the company believes may be problematic in collecting from. The next largest item on an income statement is usually something called cost of sales, or cost of goods sold, or in a bank's situation net interest expense. So, so now on the flip side you'll see, you know, cash go out or you'll see accounts payable on the balance sheet increase if you are paying over time to your vendors as as the company. There also may be something called reserves or accruals such as for warranties or for returns, and you'll see that on the balance sheet as well typically in in other liabilities section. Now finally, the you'll probably hopefully see net income on an income statement, and where that will flow is to retained earnings, and again, sometimes that is used to pay dividends back to shareholders, so there may be another category within shareholders equity that you'll see affected. For more information see if there is a seminar that is available that talks about how to read financial statements for non-accountants."