How to Find Net Income Using the Balance Sheet

Net income, a fundamental measure of financial performance, is not directly located on a balance sheet. Its primary source lies within another essential financial document.

Understanding the Income Statement

The income statement, often called a Profit and Loss (P&L) statement, details a company’s financial performance over a specific period. It summarizes revenues earned and expenses incurred, showing whether a company generated a profit or loss during that timeframe, such as a month, quarter, or year.

The income statement transforms a company’s gross revenue into its net earnings. It contrasts with the balance sheet, which presents information at a single point in time. By reviewing an income statement, stakeholders can gain insights into the business activities that generated income and those that incurred costs.

Key Components of Net Income

Net income, also known as the “bottom line,” is the final result on the income statement after all revenues and expenses have been accounted for. The calculation begins with a company’s total revenues, including sales from products or services. From this, the Cost of Goods Sold (COGS) is subtracted, representing the direct costs associated with producing the goods sold or services rendered.

After deducting COGS, operating expenses are subtracted. These are costs incurred in the normal course of business operations, such as salaries, rent, utilities, and depreciation. Non-operating income and expenses, such as interest income or gains and losses from selling assets, are also considered. Finally, income tax expense is deducted to arrive at the net income.

The Balance Sheet and Net Income’s Indirect Link

A balance sheet provides a financial snapshot of a company at a specific point in time, detailing what it owns (assets), what it owes (liabilities), and the amount invested by its owners (equity). It adheres to the accounting equation: Assets equal Liabilities plus Shareholders’ Equity. Unlike the income statement, the balance sheet does not directly list net income.

Net income from the income statement influences the balance sheet through the retained earnings account. Retained earnings represent the cumulative profits a company has accumulated that have not been distributed to shareholders as dividends. When a company generates net income, this increases the retained earnings balance. Conversely, a net loss or dividend payments reduce retained earnings.

While net income is not directly on the balance sheet, its impact is reflected in the change in the retained earnings component of shareholders’ equity from one period to the next. Analyzing changes in retained earnings on successive balance sheets, in conjunction with dividend payments, allows for an indirect understanding of a company’s cumulative profitability. The balance sheet and income statement are interconnected, providing complementary views of a company’s financial health.