# The balance sheet

> The other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.

Source: https://lopifi.com/learn/the-balance-sheet
Part of: Lopifi — US GAAP books on autopilot, reviewed by a CPA (https://lopifi.com)

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**How does the balance sheet connect to the income statement?** The other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.

The [balance sheet](https://lopifi.com/md/glossary/balance-sheet) is a photograph, not a film. It states what Northwind owns and owes at one instant — 30 September, close of business — using the three account types that carry forward. It is dated [as at](https://lopifi.com/md/glossary/as-at) that day (US filings usually say *as of*), never *for the period*.

*[Balance sheet]*

Northwind Traders, Inc. — as at 30 September 2026. USD.

*[Interactive figure: statement]*

The balance sheet on top of the set. Cash comes from the cash flow statement and retained earnings from the income statement, so assets equal liabilities plus equity by construction — nothing here is typed.

Assets are split into [current](https://lopifi.com/md/glossary/current-asset) — cash, and what will turn into cash or be used up within a year — and long-lived. Every liability Northwind has is a [current liability](https://lopifi.com/md/glossary/current-liability), due within the year, so the total of $9,450 is all current. The classification is not cosmetic: it is what lets a reader ask whether next year's obligations are covered by next year's resources.

## Where the profit went

Find $2,550 on that page. It is in equity, on the [retained earnings](https://lopifi.com/md/glossary/retained-earnings) line, and that is the whole connection between the two statements: the income statement measures a period, and its result is added to retained earnings, which is a balance. Northwind has no prior periods and has paid no dividends, so its retained earnings *is* September's net income. Next month it will be $2,550 plus October's result, less any dividend.

| Retained earnings | September |
| --- | --- |
| Opening balance, 1 September | 0 |
| Net income for the month | 2,550 |
| Dividends declared | 0 |
| Closing balance, 30 September | 2,550 |

The retained earnings roll-forward. Every later month starts from the line this one ends on.

In the ledger the transfer is a *closing entry*, normally made at year end: every revenue and expense account is emptied to zero and the difference lands in retained earnings, so the new year's P&L starts from nothing. Until then, most software computes the year's result and shows it on the retained earnings line for you. Had Northwind's year ended on 30 September, this is the entry:

| Account | Debit | Credit |
| --- | --- | --- |
| 4000 Revenue | 31,500 |  |
| 5000 Cost of revenue |  | 17,000 |
| 6000 Payroll expense |  | 8,400 |
| 6200 Rent expense |  | 2,000 |
| 6300 Insurance expense |  | 600 |
| 6400 Depreciation expense |  | 500 |
| 6500 Utilities expense |  | 450 |
| 3100 Retained earnings |  | 2,550 |
| Total | 31,500 | 31,500 |

The closing entry, built from the adjusted trial balance. Revenue is debited to zero, each expense credited to zero, and the net income is the balancing credit to retained earnings.

*[The accounting equation]*

$72,000 of assets, $9,450 of obligations, $62,550 of owners' claim. It balances because every entry made it balance.

> **Assets = liabilities + equity holds on the balance sheet because it held after every single entry that produced it. The statement does not make it balance; it reveals that it already did.**

## What the shape tells you

| Reading | September | What it says |
| --- | --- | --- |
| [[working-capital|Working capital]] (current assets − current liabilities) | 39,050 | Comfortable — a [[current-ratio|current ratio]] of 5.1: obligations are covered several times over. |
| Cash as a share of assets | 46% | Nearly half the balance sheet is cash, which is what a month-old company looks like. |
| Receivables | 8,000 | 25% of the month's revenue is uncollected. Worth watching, not yet worth worrying about. |
| Inventory | 1,000 | $17,000 of the $18,000 bought has already sold. Either efficient or under-stocked — the next month tells you which. |

> **The van, twice.** The balance sheet shows the van at $24,000 with ($500) of accumulated depreciation beside it, rather than a single $23,500. Keeping the contra account visible is what lets a reader see that this is a nearly-new asset rather than an old one nearly written off.

**Check yourself.** Where does September's $2,550 of net income appear on the balance sheet?

- Cash — profit is money the company made. — Cash is $32,900, and it got there by a different route entirely. Profit is not a pile of money; lesson 12 is the proof.

- Retained earnings, inside equity. — Net income is the change in the owners' residual claim from trading. It lands in equity, and the assets that represent it are spread across every line on the left.

- Nowhere — the balance sheet only shows what the company owns and owes. — It also shows what the owners' claim is, and profit is precisely an increase in that claim.

- **Lesson:** 11 of 13 — 10 min
- **Terms taught:** [Balance sheet](https://lopifi.com/md/glossary/balance-sheet), [Asset](https://lopifi.com/md/glossary/asset), [Liability](https://lopifi.com/md/glossary/liability), [Equity](https://lopifi.com/md/glossary/equity), [Retained earnings](https://lopifi.com/md/glossary/retained-earnings), [As at](https://lopifi.com/md/glossary/as-at), [Current asset](https://lopifi.com/md/glossary/current-asset), [Current liability](https://lopifi.com/md/glossary/current-liability), [Working capital](https://lopifi.com/md/glossary/working-capital), [Current ratio](https://lopifi.com/md/glossary/current-ratio), [Contra account](https://lopifi.com/md/glossary/contra-account)
- **Previous:** [The income statement](https://lopifi.com/md/learn/the-income-statement)
- **Next:** [The cash flow statement](https://lopifi.com/md/learn/the-cash-flow-statement)
- **The course:** https://lopifi.com/learn