Does an "income statement DRIVE the balance sheet"???

Question

I'm trying to do some homework and I think that my teacher made a mistake with the directions. We have to do an excel spreadsheet of a company's financial statements. It says that "the income statement drives the balance sheet". I cant seem to find the connection between the two. Please help!

Answer 1

I think what she meant was you must finish the income statement first to obtain the profit or loss before you can arrive at the retained earnings balance at the end of the year. The retained earnings amount needs to be entered in the balance sheet for it to be complete.

Answer 2

The first post from Sandy is absolutely correct. The income statement is report that summarizes the revenues and expenses for current period, which can result in either a profit (net income) or loss (net loss). While the balance sheet is a report at specific point in time. The balance sheet in the equity section contains an account called retained earnings. Retained earnings contains the cumulative earnings and/or losses of the company since inception. Therefore, in order to complete the balance sheet, the income statement must be done first, so you can have the profit or loss amount to add or deduct from your retained earnings account. Hope this helps!