Accounting · Lesson Plan

Linking the Income Statement and the Balance Sheet

The two most widely used financial statements — the income statement and the balance sheet — aren’t separate islands; they connect. This lesson teaches what each statement reports (the income statement’s inflows and outflows that net to income or loss; the balance sheet’s assets, liabilities, and equity) and, crucially, how net income flows from the income statement into equity on the balance sheet, tying the two together. Students trace the link on a worksheet.

Grades 11–12 / College Lesson Plan 45–60 minutes Free Lesson Plan Lesson & Worksheet: Full Membership

Linking the income statement and balance sheet lesson illustration

For Teachers

Lesson at a glance

Topic: Accounting
Grade Level: Grades 11–12 / College
Resource Type: Lesson + Worksheet
Estimated Time: 45–60 minutes
Format: Lesson + worksheet
Materials: Printable lesson, worksheet, pencils

What Students Learn

Learning objectives

Describe what the income statement reports
Define net income and net loss
Describe what the balance sheet reports
Explain how net income flows into equity
Trace the link between the two statements

Materials

What you’ll need

Printed lesson and worksheet (one per student)
Calculator
Pencils

Key Terms

Vocabulary

Income statement: A report of revenues and expenses over a period.
Net income: The excess of revenues (inflows) over expenses (outflows).
Net loss: The excess of expenses over revenues.
Balance sheet: A report of assets, liabilities, and equity at a point in time.
Equity: The owners’ claim on the business after liabilities.
Retained earnings: Net income kept in the business, raising equity.

For Teachers

Lesson plan

Estimated time: one 45–60 minute class period.

Lesson sequence

The income statement (12 min). Inflows minus outflows; net income vs. net loss.
The balance sheet (12 min). Assets, liabilities, and equity at a point in time.
The link (13 min). How net income flows into equity, connecting the statements.
Worksheet (13 min). Students trace net income from one statement to the other.

Assessment

Assess the worksheet for a correct link between net income and the change in equity.

Discussion

Discussion questions

What does the income statement report?
What is net income, and how is it calculated?
What does the balance sheet report?
How does net income affect equity?
Why are the two statements linked rather than separate?

Printable Lesson & Worksheet