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1) An Income Statement shows the result of the Financial Operations of the entity during a given period of time listing out the various Incomes and Expenses causing the final result.
2) A Balance Sheet, on the other hand shows the Financial Position of the entity as on a given date. It contains the Balance of the Income Statement carried forward from previous years and the Net Income earned during the current period.
In this way, these two statements are connected with each other on the basis of the Net Balance of the Income Statement appearing on either sides of the Balance Sheet as on a given date.
In addition to that
1) All the Provisions such as Depreciations, amortisations and write off against the assets as per the Income Statement need to be the same as has been deducted / added to the corresponding assets or liability Ledgers as per Balance Sheet for the related period. For Example: The Depreciation charged to the Property Plant and equipment during the period (As per the Income Statement) shall be the same as has been added to the Accumulated Depreciation.
2) All the Write back of Liabilities, Upward revalaution of Assets, Recovery of earlier recognised Bad debts etc as per the Income Statement shall be the same as have been adjusted against the Concerned Assets / Liabilities ledgers in the Balance Sheet during the period under reporting.
Income statement shows the profit or loss earned from the business, ie, excess of income over expenses, or wiseversa. The profit or loss of the business is the reward(return) to the capital investment. So the profit or loss of the business is credited or debited with the capital A/c & shows in the balance sheet. Balance sheet is the report of assets & liabilities.
The balance sheet reports a company's assets, liabilities, and owner's equity as of the last instant of an accounting year. Generally, the amount of the owner's equity will have changed from the previous balance sheet amount due to
the company's net income
the owner's additional investments in the business
the owner's withdrawals of business assets
If the owner did not invest or withdraw, the change in owner's equity is likely to be the amount of net income earned by the business. The revenues, expenses, gains, and losses that make up the net income are reported on the company's income statement.
To illustrate, let's assume that a company's balance sheets had reported owner's equity of $40,000 as of December 31, 2012 and $65,000 as of December 31, 2013. If during the year 2013 the owner did not invest or withdraw business assets, the $25,000 increase in owner's equity is likely to be the net income earned by the business. The details for the $25,000 of net income will appear on the company's income statement for the year 2013. (If the owner had withdrawn $12,000 of business assets for personal use, the net income must have been $37,000 since the net increase in owner's equity was $25,000.)
The connection between the balance sheet and the income statement results from the use of double-entry accounting or bookkeeping and the accounting equation Assets = Liabilities + Owner's Equity.
