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Explain the relationship between net income on the income statement and the equity section of the...

Explain the relationship between net income on the income statement and the equity section of the balance sheet.

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Answer #1

Net income is income earned during the year. It is calculated or shown in the income statement. Equity is the residual interest in the company or it is shareholder's stake in the company. It is shown in the balance sheet.

Equity is related to net income because equity consists of capital contributed and retained or accumulated earnings. When net income is calculated, then, every year usually, a part of it is retained in the business (i.e. not distributed as dividend) and it is called as retained earnings or accumulated income. This retained earnings will then become part of equity in the balance sheet.

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