An income statement, also referred to as a statement of profit and loss, indicates the revenue of a company over a given period of time. Shareholders’ equity, also known as owners’ equity, indicates a company’s net worth. Equity represents the amount owners receive if the business liquidates its assets and pays off existing obligations. Shareholders’ equity appears on a company balance sheet as opposed to an income statement.
An income statement indicates whether a company made or lost money. A company income statement details the revenue generated by a company over a specific period of time, as explained by the United States Securities and Exchange Commission website. Also, an income statement shows the expenses incurred during the same period to generate revenue. If revenues are greater than expenses, the company has net earnings. When a company’s expenses exceed revenues, the company has net losses.
Equity exists as a balance sheet account and has a normal credit balance. This means that a credit to the shareholders’ equity account increases the amount of equity in the business. On the contrary, a debit to the shareholders’ equity account decreases the amount of equity owners have in the business. The accounting equation, which states assets equal liabilities minus equity, provides the basis for calculating the amount of equity in a business. A company must subtract liabilities from assets to discover the amount of equity in the business.
The balance sheet consists of assets, liabilities and shareholders’ equity. The shareholders’ equity section of the balance sheet consists of preferred and common stock, treasury stock, paid-in capital and retained earnings. Common and preferred stock represents ownership interest in the business. Paid-in capital indicates the amount contributed by shareholders in exchange for shares of a company. Retained earnings show the amount of net earnings reinvested in the business. Treasury stock details the amount of shares a company owns of its own stock. Unlike the other equity accounts, treasury stock has a normal debit balance and is subtracted from the amount in shareholders’ equity.
When a company has net earnings on its income statement, it increases the amount of shareholders’ equity. For example, a company with net earnings that does not issue dividends to investors will experience an increase or credit in the retained earnings account. On the contrary, net losses on a company income statement signal a decrease or debit in the retained earnings account. When a company issues dividends to shareholders, it decreases the amount of the shareholders’ equity account.