What is Relationship between Balance Sheet and Income Statement

There is deep relationship between balance sheet and income statement. Both balance sheet and income statement affects each other which can be written in following words. 

1. How does Income Statement Affect Balance Sheet

Every change in our income statement will affect the strength of our balance sheet. We know that income statement shows the net income or net loss of business. Net income will increases our capital of business. So, with this, our balance sheet becomes more strong. Same excess capital will be in cash in this current time or in future. With this excess capital fund, we can promote our business. 

In the other side, if we are facing net losses whose information who got from our income statement. It will become the barrier of the growth of our balance sheet. Net loss will decrease our current capital. So, with low total capital, our working capital will also decreases. With this, we can face the difficulty of funds for our routine business activities. 

2. How does Balance Sheet Affect Income Statement

Balance sheet's power or weakness can directly or indirectly affect the income statement. If there is more debt and less own capital in our balance sheet, it will increase more burden of interest and our net profit will decrease directly from this. 

3. Relationship between Each Item of Income Statement and Balance Sheet

All are assets and liabilities are personally connected with income statements items. We can make its list. 

a) Sales revenue is the the item of income statement but it represent cash in hand and account receivables in balance sheet. 

b) Cost of goods sold of income statement has relation with creditors for goods purchase (liability) and closing stock (current asset)  in the balance sheet

c) We can show the depreciation in income statement if we show any fixed asset in the balance sheet. 

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Balance SheetIncome StatementAccounting BasicsBookkeepingAccounting EquationFinancial Accounting