This week’s episode of Conversations with Kip discusses what an Income Statement is, why it is important, how it is made and its relationship to the Balance Sheet.
Although almost all financial analytics begins with a balance–a position as of a point in time–the balance sheet does not explain why the balance is the balance or the position. Activity over time is what gives a sense of why something arrived at that spot.
The Income Statement is the why in many respects. It explains the changes in the Balance Sheet over time. It is a measure of the change between two balance sheet periods; for example last year and this year.
It has three parts:
- Revenue, which is what we take in,
- Expenses which is what we pay out, and
- The difference between the two is Net Income (if we took in more than we paid out) or Net Loss.
Revenues have an affinity to the Asset side of the Balance Sheet; Expenses to the Liability side; and the Equity portion of the Balance Sheet is the accumulation of Net Income or Net Losses over time.
Watch the Next Episode: Introduction to the Accounting Cycle
What the Prior Episode: Introduction to the Balance Sheet
Watch all episodes in order at the Conversations with Kip Playlist.