The balance sheet and income statement are connected.
In the tip of April 20, I mentioned that adjusting entries almost always involve both a balance sheet account and an income statement account. (For example, the cost of supplies that are no longer on hand is moved from the balance sheet to supplies expense on the income statement. Insurance premiums that are no longer prepaid are moved from the balance sheet to insurance expense on the income statement.) The first accounting course teaches us that the basic accounting equation is Assets = Liabilities + Owner’s Equity. Owner’s Equity or Stockholders’ Equity is a section of the balance sheet that increases when the company’s net income increases.
The point of these observations is the following tip: The number of balance sheet accounts is usually small in relation to the number of income statement accounts. If you can be certain that the relatively few balance sheet accounts have the correct ending balances, you can have some confidence that the bottom line of the income statement is proper. (The income statement may contain errors–perhaps you entered an amount into the wrong account–but the overall net income has a good chance of being correct.)
I received this tip from a CPA named Bob many years ago, when he helped me to delegate some accounting work. I continue to value his insight.
Learn more about the Accounting Equation.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years. He is the creator and author of all the content found on AccountingCoach.com. You can read 1,500 testimonials praising his ability to explain accounting in a way that anybody can understand.
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