Are you one of those people who don’t know how to calculate net income from the balance sheets? The basics are very simple and it doesn’t take rocket science to figure out to make sense of the contents of a balance sheet.
We’ll provide you some basic knowledge about balance sheets which will hopefully help you learn how to calculate your net income.
Before we learn how to calculate your net income from the balance sheet let us first learn the basic terms used here. We’ll start off with net income which means the amount of income that you have acquired after deducting your costs and expenses. For a business or company net income is basically the company’s profit. To arrive at a company’s net income you will start with the company’s total revenue. From this figure, all expenses that the company incurred during the period involved are deducted to reach the income before tax. After the tax is deducted the net income is then reached.
The next thing we need to learn about is the balance sheet. A balance sheet is the financial file that corresponds to all the things that you own, all the things that have borrowed and the net worth of the business. All the things that you own are called assets. Assets can be in the form of cash, or anything that can be converted to cash such as accounts receivables. Fixed assets like cars and office equipments belong to a company’s assets. The things owed are called liabilities. Liabilities include everything that the company owes from creditors like banks and lending organizations. The difference between what the company owns and what the company owes correspond to its equity and it is the owner’s share of the company. For companies with sole
ownerships equity corresponds to its capital while for publicly owned companies, equity is often called common stock or shared capital. The main purpose of having a balance sheet is to show your financial status at any given period of time and always includes the term “as at. ” in its title. The name balance sheet is derived from the fact that your assets must always be equal to your liabilities plus the equity; hence their equality signifies that they are balanced.
How can we calculate net income from the balanced sheet? In its simplest form the income statement can be expressed in this equation: Revenue – Expenses = Net Income (Loss). To calculate income using the information on the balance sheet, you need to calculate the company’s total income for the given period of time (example: a year) by adding up all the net sales including income from other resources. This should only include the actual received income and not borrowed money or any expected income. Next thing to do is add the company’s total operational expenses. Operational expenses include purchases for items sold, employee’s salaries and overhead costs. Discounts on products, returns and all other expenses should also be included. Establish the cost of all additional expenses such as taxes, and financing/interest expenses and add this to the operational expenses of the company. All of this would add up to the company’s total overall expenses for the year. Subtract these expenses to the company’s total income using the formula:
Net Revenue - Total Expenses = Net Income
The answer would be the company’s net income for the year. If the number is positive, then we can say that the company made a net gain and if it is negative, then it is the company’s net loss.