Definition of Income Statement and Balance Sheet Accounts
A company's general ledger accounts are arranged into two categories based on the financial statement where their amounts are reported:
- Balance sheet accounts, which consists of asset, liability, and owner's (stockholders') equity accounts
- Income statement accounts, which consist of revenue, expense, gain, and loss accounts
Examples of Accounts Affected by Transactions
Most transactions typically affect either of the following:
- Only balance sheet accounts. When a company borrows money, its asset account Cash increases and its liability account Loans Payable increases. When a company pays one of its accounts payable, its Cash account decreases and its liability account Accounts Payable decreases.
- Both balance sheet and income statement accounts. When a company pays its May rent on May 1, its asset account Cash decreases and its income statement account Rent Expense increases. When the company records its accrued interest expense, its liability account Interest Payable increases and its income statement account Interest Expense increases.
As shown above, some transactions will affect two balance sheet accounts (and no income statement).
Entries to reclassify an expense (or revenue) will affect two income statement accounts. For example, assume that a transaction was incorrectly recorded in the income statement account Advertising Expense, but should have been recorded in the income statement account Promotion Expense. The correcting entry will credit Advertising Expense and will debit Promotion expense.
It is important to note that the income statement accounts are referred to as temporary accounts, since their balances affect a corporation's Retained Earnings account (or a sole owner's capital account) and will be closed to these balance sheet equity accounts at the end of the accounting year.