Retained Earnings: The Link Between Balance Sheet and Income Statement

How is the balance sheet affected by the lemonade stand’s profitability during the course of 2005?

  • The income statement is connected to the balance sheet through retained earnings in shareholders’ equity:

    • Income (revenues, etc.) increases retained earnings: reflected as a credit to retained earnings.

    • Expenses (COGS, SG&A, etc.) decrease retained earnings: reflected as debits to retained earnings.

[View full size image]

Get Crash Course in Accounting and Financial Statement Analysis, Second Edition now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.

Start your free trial