Financial Glossary
Calculating Net Income from a Balance Sheet
Net income is normally reported on the income statement, but it can be inferred from comparative balance sheets through the change in retained earnings. The relationship is: ending retained earnings equals beginning retained earnings plus net income minus dividends or owner distributions. Rearranging that equation lets you back into net income when only balance sheets are available.
Problem & Application
Owners reviewing year-end statements, or a lender working from limited records, often need to reconcile profit to the equity section. If retained earnings barely moved despite a profitable year, distributions or an error are usually the cause, and the balance-sheet check surfaces it. This reconciliation is a quick integrity test that the three statements actually tie together.
In Short
Reading net income off the change in retained earnings ties the income statement to the balance sheet and catches discrepancies between profit and equity.