1.) Lets say I have

Assets = 100 Liabilities = 50 Share holders equity = 50.

Assets = Liabilities + Shareholders equity satisfies.

Now at the end of the year say I have net Income of 20.

My shareholders equity will become 70.

Due to this the equation Assets = Liabilities + Shareholders equity does not satisfy.

100 = 120.

This equation can be only satisfied if my assets increase by 20 or my liabilities decrease by 20. So what will happen in this case?

2.) Why we put interest expense on Income Statement and not on Balance sheet?

3.) What other account will be credited if I increase my shareholder's equity?

  • hint: what did you do with the 20 income? – littleadv Mar 17 '16 at 8:52

1.) There is no logic in this question, because when there is an increase in net income for the year it will be in the form of something, ie it can be cash and cash equivalent like cash in hand or cash at bank. So as your ques says if there is increase in net income of 20 then asset side also increase by 20(cash) which makes the equation Asset = liability + share capital tally

2.) Balance sheet is a statement of assets, liabilities, and capital of a business or other organization. Expenditure or income related items wont come under balance sheet it comes under profit and loss account

3.) Stockholders' equity can increase just as easy. When a firm issues bonus to the existing share holders from free reserve a/c or capital redemption reserve a/c or security premium this will increase the share holders equity and also decreases the reserve a/c

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  • Thanks! I have one more question, When my income rose up to 20, that will go into retained earnings which will increase shareholders equity, not my cash? How would net income of 20 will increase my cash, because income of 20 will go into retained earnings? – Inder Gill Mar 17 '16 at 9:50

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