This video shows how the balance sheet and income statement are related to one another. The income statement includes temporary accounts that are netted to compute “Net Income.” At the end of the year, these temporary accounts are closed out (their balances are made to equal zero) and the Net Income (or Net Loss) is transferred to the permanent balance sheet account “Retained Earnings.” The temporary account “Dividends” is also closed out at year-end to the permanet balance sheet account “Retained Earnings.” Thus, the result of the income statement (Net Income or Net Loss) is transferred to a permanent balance sheet account. Thus, the income statement and balance sheet are connected through Net Income (or Net Loss) and its effect on Retained Earnings.