Understanding Accounting Formulas and Net IncomeAccounting formulas are used to measure various aspects of the business, but all of them are derived from one main formula:
This formula applies to every transaction in accounting and affects each of the financial statements in different ways. For this discussion of the income statement, we can see this formula in action on owner's equity. Earlier we congratulated Sunny for his 2007 profit. Sunny made a net income of $15,283, which directly increased the value of his business.
From this formula we can see that the value of the business, or owner's equity, is directly affected by net income (as well as investments by owners, either privately or by stockholders). The amount retained from profits, or net income, is accumulated in Retained Earnings. Retained Earnings is a part of Owner's Equity that is listed on the balance sheet. The other part of Owner's Equity, as the above formula shows, is investments by owners, and is listed on the balance sheet as:
Net income profits (or losses) accumulate in the Retained Earnings account from year to year, which directly impacts the value of the company. Net income truly is the "bottom line" goal as it directly affects the value of your business.
|
