Name: Income statement and balance sheet relationship
Uploaded: 2017-06-23T12:57:02.000Z
Duration: 5 min 15 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

Hi.  This lesson we're going to talk about how the income statement

relates to the statement of retained earnings

and then how that statement of retained earnings

flows in or relates to the balance sheet.

So first of all let’s just define quickly what an income statement is.  An income

of the business for the year in this example  is year 1

in advertising, telephone and other expenses we've identified here.

So whatever is left over is something called net income

There are different ways to call it.  But in this example let’s just stick with net income.

1,000 minus 950 gives us the net income of $50.

Now the second statement here…and you'll see here that the

So retained earnings…all retained earnings is – is  the accumulation of profits

So the retained earnings at the end of the period is $50. Now let's

and we had another net income or  profit of $25.  So at

Now let’s say in year 3 we had a net loss

So at the end of year 3 our retained earnings would  be $50.

So again retained earnings is just the  accumulation of profits and

from day 1 of the of the business to whatever  point in time you’re at.

So right now in our example we’re at the end of  year 1.

So first of all, just to show you how the  statement of retained earnings

ties into the balance sheet you'll see that the $50 here

through the shareholder’s equity section

So that $50 flows right through from the income statement

to the statement of retained earnings  right into the balance sheet.

define what a balance sheet is.  A balance sheet is…

you look at all the assets of the business.  So assets of the business

can be anything that the business owns.  That could be cash, that can be

amounts on account that customers owe them,

it could be tables, chairs,  equipment  - that sort of stuff.

or items that the company owes money for.  So  if they bought supplies on account from

liabilities would be if they borrowed money and they owe money to the bank.

And finally you have something called the shareholders equity section.

And there's a couple of components in this section.  I just wanted to

put in retained earnings - that's the main  one.  There’s

something called capital stock but won’t  put that in here right now.

So retained earnings is the shareholder’s  equity in this example.

By definition the balance has  to balance.  So the equation I just did

here assets equals liabilities plus equity.

You can see that here the $100 in assets is equal to the $50

Another way to state this formula that some people

think about a house.  If you owned a house – the  asset

your equity would be $50,000.  The same  things applies in a

show you how the income statement, the statement of retained  earnings, and balance sheet are all tied to one another

and to give you a quick overview of what each financial statement does.  And one last thing I forgot to

mention on the statement of retained earnings there is something else called dividends that

Subtitles ListPlay Video

Income statement and balance sheet relationship

stuff

sort

stick

assume