How the Income Statement and Balance Sheet are Connected | Example
The income statement and the balance sheet are connected in that:
net income from the income statement affects retained earnings on the balance sheet.
You can see that here with Amazon. At the beginning of 2020, Amazon had retained earnings of $31.2 billion. It then posted net income of $21.3 billion for 2020. Thus, Amazon’s retained earnings at the end of 2020 was $52.5 billion. Retained earnings increased because Amazon turned a profit. If Amazon had instead posted a net loss, the loss would have decreased retained earnings.
Now let’s take a look at ExxonMobil. The company had $421.6 billion of retained earnings at the beginning of 2019. It then posted a net income of $14.3 billion for 2019. However, retained earnings was actually lower at the end of year: $421.3 billion. This is because ExxonMobil paid $14.6 billion of dividends to its shareholders. And while net income increases retained earnings, dividends decrease retained earnings. Thus, ExxonMobil’s retained earnings at the end of 2019 was $421.3 billion. This was equal to its beginning retained earnings balance plus net income and minus dividends.
0:00 Introduction
0:10 Amazon Example
0:36 ExxonMobil Example
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