The process of financial accounting relies on many key pieces of data from a company's transactions over the course of a year or fiscal quarter. However, some of the most useful figures come from calculations involving existing data. Businesses note their assets, liabilities and owners' equity in financial statements, but investors can use this information to determine net income in some cases.
You can use your current data regarding assets, liabilities and equity to definitively calculate your company's net income.
Exploring Financial Definitions
Each financial accounting term has its own specific meaning and place within the accounting system. Assets refer to things that a business owns, including cash, that have monetary value. Liabilities are debts and other financial obligations. Owners' equity, known as stockholders' equity in companies with public shareholders, refers to the remaining money that belongs to the shareholders after factoring in the value of a company's assets and liabilities. Each of these pieces of basic financial data appears on the balance sheet, which is one of the main financial statements. The basic equation that ties this information together is: total assets equal the sum of liabilities plus owners' equity.
Calculating Net Income
Net income refers to the money a business earns in a given period of time, minus all of the costs it takes on during the same period of time to make that money. When a company tracks its total revenue, it is recording gross income. Net income is part of owners' equity. To determine net income, stockholders and analysts must begin with the latest owners' equity report, which comes from subtracting assets from liabilities. Subtracting owners' equity at an earlier point in time from current owners' equity reveals the net income over that period of time.
Additional Relevant Information
If a company issues stock, the process for calculating net income is somewhat more complicated. Analysts will need two additional pieces of data to make accurate determinations about net income. These pieces of data are the revenue from the sale of new stock and expenses from paying dividends to investors. To determine net income when a company issues stock or pays dividends, subtract the value of the stock and add the cost of paying dividends to the difference between current owners' equity and owners' equity at the beginning of the period you wish to measure net income for.
Evaluating Your Results
Net income refers to the value that a company gains for its stockholders or owners over a given period of time. It represents the profit a business earns and passes on to its owners, either in the form of cash dividend payments or by increasing the value of the business and, often, driving the market price of shares higher. Fluctuations in net income can indicate many things, including changing costs and liabilities, changes in profit margin or fluctuations in revenue.
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- U.S. Securities and Exchange Commission. "Beginners' Guide to Financial Statement." Accessed July 6, 2020.
- Nasdaq. "Paid-In Capital." Accessed July 6, 2020.
- Nasdaq. "Retained Earnings." Accessed July 6, 2020.
- Financial Accounting Standards Board. "Statement of Financial Accounting Standards No. 130," Page 38. Accessed July 6, 2020.
- U.S. Small Business Administration. "5 Things to Know About Your Balance Sheet." Accessed July 6, 2020.
- U.S. Securities and Exchange Commission. "How to Read a 10-K." Accessed July 6, 2020.