Accounting All-in-One For Dummies, with Online Practice, 2nd Edition

Chapter 6

Coupling the Income Statement and Balance Sheet

IN THIS CHAPTER

Seeing connections between the income statement and balance sheet

Fitting key pieces into the balance sheet puzzle with operating ratios

Adding assets to the balance sheet

Examining debt versus equity on the balance sheet

Every time you record a sale or expense entry by using double-entry accounting, you see the connections between the income statement and balance sheet (see Book 1, Chapter 2 for more about double-entry accounting and the rules for debits and credits). A sale increases an asset or decreases a liability, and an expense decreases an asset or increases a liability. Therefore, one side of every sales and expense entry is in the income statement, and the other side is in the balance sheet. You can’t record a sale or an expense without affecting the balance sheet. The income statement and balance sheet are inseparable, but they aren’t reported that way!

To properly interpret financial statements — the income statement, the balance sheet, and the statement of cash flows — you need to understand the ...