Balance sheets connect through various financial activities that occur over time. First, the net income from the income statement adds to retained earnings in the equity section of the balance sheet, reflecting the company’s profitability. When dividends are paid to shareholders, this reduces retained earnings. Changes in assets also play a role; for example, purchasing equipment increases total assets, while selling inventory decreases them. Similarly, liabilities fluctuate with financial decisions—taking out loans increases liabilities, while paying them off decreases them. Additionally, contributions from owners increase equity, whereas withdrawals decrease it. Each period’s balance sheet is shaped by these changes, creating a continuous flow of financial information.