The Income Statement and Balance Sheet are not isolated documents; they are linked through Equity. The Income Statement explains the change in owner wealth over time, while the Balance Sheet shows the final summary of that wealth on a specific day.

Net profit belongs entirely to the owners of a business. At the end of the year, this profit is transferred to the equity section of the balance sheet to increase the owner’s capital. Conversely, any personal drawings made by the owner during the year reduce the capital balance.

\(\text{Closing\ Capital}=\text{Opening\ Capital}+\text{Net\ Profit}-\text{Drawings}\)

If your double-entry records are accurate and your adjusting entries were posted correctly, the updated equity section will match your net assets perfectly. The final line of the Balance Sheet will balance automatically.