Handling Net Income

A company’s net income is how much money they earned, less the expenses of running the company during that period. Near the bottom of the balance sheet, you can see that net income is shown as a single entry. This makes it appear to be a single account in the database, but that is not the case. It is a sub-total of many related accounts. Depending upon your database and at what point of the year you are in, there are different ways for you to arrive at the net income balance.

A company makes money and pays off expenses throughout the year. These transactions are tracked using revenue and expense accounts. At the end of the year, adjusting entries are made to summarize the net income balance and this is transferred into the Retained Earnings account. The income is reset to zero for the next year. Thus, all the net income for prior years is accumulated in the Retained Earnings account. If a balance sheet is printed after the year-end adjusting entries were made, the net income balance will be zero. The balance sheet will only need to show the retained earnings balance since there is no net income. You can filter out the revenues and expenses from the balance sheet so that they aren’t displayed.

If the balance sheet is printed during the year, the adjusting entries haven’t been made yet. Thus, the balance sheet needs to show the net income because it hasn’t been closed out yet and still has a balance. To do this, you need to summarize the revenues and expenses together to get a final balance for the net income (or a net loss if the company didn’t make a profit). The sub-total should be shown on the balance sheet as a single entry titled Net Income.

Depending upon how familiar you are with accounting, you might have to consult with an accountant to find out how your company handles net income. You could also review the journal entries at the end of the year to see if the year-end adjustments include posting the net income into retained earnings.