Accounting Fundamentals Certification (AFC) Practice Test

The balance sheet is prepared after the income statement because it reflects the financial position of a company at a specific point in time, typically at the end of an accounting period. The income statement provides details on the company’s revenues and expenses over that same period, resulting in net income or loss.

The net income determined from the income statement affects the equity section of the balance sheet, specifically retained earnings. Therefore, to accurately present the balance sheet and incorporate the results from the income statement, it is necessary to prepare the income statement first. This sequence ensures that the financial outcomes of the reporting period are completely integrated into the balance sheet, providing an accurate snapshot of the financial position, including assets, liabilities, and shareholders' equity, reflecting the impacts of the financial performance indicated in the income statement.

While there are scenarios where the balance sheet and income statement may be prepared concurrently for internal reporting purposes, following the income statement ensures clarity and proper order in external financial reporting.