How does net income effect the balance sheet?

Answer 1

Take your gross income (revenues) over the period in question, usually one year, and then subtract all the expenses you had in order to earn that income. This will bring you down to a net income...on the income statement. There is no net income on the balance sheet per se. You net income from the income statement hits the balance sheet when you close out the books for the year. Then it moves over to the retained earnings segment in the balance sheet.

Answer 2

Net Income = Total Debits - Total Credits for Balance Sheet Accounts.

On the Balance Sheet Financial Statement, the Net Income entry provides the balancing figure for the Accounting Equation: Assets = Liabilities + Equity ---- First for any who might need to know, we will define Net Income.

A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share.

Net Income or Net Profit does not directly effect the balance sheet, in actuality it appears on only two of the financial statements.

1. Income Statement

2. Statement of Retained Earnings

To figure Net Income, we use the Income Statement where we list all Revenue Earned and subtract all expenses. This gives us either a Net Profit (or Net Loss)

We then use Net Income (Profit or loss if applicable) on the Statement of Retained Earnings, where we deduct any other cost that are not considered expenses, such as dividends paid, stock paid, etc. to get our Retained Earnings.

It is Retained Earnings that effects the Balance Sheet and not Net Income.

For Example

Say we have the following

Revenue $15,000

Expenses $ 3,000

We subtract to get our Net Income of $12,000

On the Statement of Retained Earnings we would show $12,000, say we have $4,000 in Dividends we paid, this would give us a balance of $8,000 of Retained Earnings.

Retained Earnings for $8,000 would be listed on the Balance Sheet under Stockholders Equity or Owners Equity This keeps our Accounting Equation In Balance Assets = Liabilities + Owners Equity (or Stockholders Equity)