…Let’s discuss a single transaction to clarify the impact it has on the income statement and balance sheet to summarize the article. Let’s say ABC auto dealership sold a car for $50,000.00. Price that it paid to the manufacturer was $40,000.00. So, sales were $50,000.00 COGS was $40,000.00 and the gross profit was $10,000.00. Let’s see effect on the balance sheet; cash will increase by $50,000.00, inventory will decrease by $40,000.00 and retained earnings will increase by $10,000.00 since net income will have a positive effect on retained earnings. Thus, assets increased by $10,000.00 and liabilities plus owner’s equity have increased by the same amount. Accounting equation is correct.
This is a short and very basic summary of an income statement for non-accountants. It gives a basic idea on income statement and its components. If you would like to learn more, there are web sites like the authors that offer discussions and articles by professionals, have lists of books that offer a more detailed information on basic accounting courses. One of the examples is author of this article’s book. It is a very good source on accounting and profession in general. You will find some interesting discussions about accounting concepts, principles, accounting fraud and ethics issues profession faces today.
I hope this short article will give you a basic information on income statement and will motivate you to learn more about the subject.