Definition of Net Income
Net income is the positive result of a company’s revenues and gains minus its expenses and losses. A negative result is referred to as net loss. (There are a few gains and losses which are not included in the calculation of net income. However, they are part of comprehensive income).
Net income is also known as net earnings. The details of the net income calculation are reported in the business’s income statement.
The net income of a regular U.S. corporation includes the income tax expense which pertains to the items reported in its income statement. The net income of a sole proprietorship, partnership, and Subchapter S corporation will not include income tax expense since the owners (not the entity) are responsible for the business’s income tax.
Effect of Net Income on the Balance Sheet
A corporation’s positive net income causes an increase in the retained earnings, which is part of stockholders’ equity. A net loss will cause a decrease in retained earnings and stockholders’ equity.
A sole proprietorship’s net income will cause an increase in the owner’s capital account, which is part of owner’s equity. A net loss will cause a decrease in the owner’s capital account and owner’s equity.
