Which component connects the balance sheet to the statement of shareholder equity?

The component that connects the balance sheet to the statement of shareholder equity is retained earnings. Retained earnings reflect the cumulative amount of profit that a company has retained in the business rather than distributed as dividends to shareholders. This figure is reported on the balance sheet under shareholders' equity and is adjusted for any profits or losses and dividends declared during the period, all of which are detailed in the statement of shareholder equity.

The statement of shareholder equity begins with the beginning balance of retained earnings, adds net income (or subtracts net losses) from the income statement, and subtracts any dividends paid. Consequently, retained earnings serve as a crucial link between the income statement, which affects net income, and the balance sheet, where the ending retained earnings balance appears in connection with the overall equity of the company. This integration of information is vital for understanding how a company's operational results influence its financial position over time.