Accounting For Dummies®, 4th Edition

5.3. Coupling the Income Statement and Balance Sheet

Chapter 4 explains that sales and expense transactions change certain assets and liabilities of a business (which are summarized in Figure 5-1). Even in the relatively straightforward business example introduced in Chapter 4, we see that cash and four other assets are involved, and three liabilities are involved in the profit-making activities of a business. I explore these key interconnections between revenue and expenses and the assets and liabilities of a business here. It turns out that the profit-making activities of a business shape a large part of its balance sheet.

Figure 5-3 shows the vital links between sales revenue and expenses and the assets and liabilities that are driven by these profit-seeking activities. Please note that I do not include cash in Figure 5-3. Sooner or later, sales and expenses flow through cash; cash is the pivotal asset of every business. Chapter 6 examines cash flows and the financial statement that reports the cash flows of a business. Here I focus on the non-cash assets of a business, as well as its liabilities and owners' equity accounts that are directly affected by sales and expenses. You may be anxious to examine cash flows, but as we say in Iowa, "Hold your horses." I'll get to cash in Chapter 6.

The income statement in Figure 5-3 continues the same business example I introduce in Chapter 4. It's the same income statement but with one modification. Notice that the depreciation expense ...