As a small-business owner, completing an income statement and a balance sheet are important accounting tasks that you perform. To arrive at net income on the income statement, you subtract the company’s revenues and gains from expenses and losses for the reporting period. The balance sheet shows the company’s assets, liabilities and owner’s or stockholder’s equity from its start date until its end; therefore, the balance sheet does not include net income per se. Still, you can figure out net income based on assets, liabilities and owner’s or stockholders’ equity.
1. Tally your fixed and current assets, such as accounts receivables, cash, office furniture, inventory, buildings, petty cash and land. Specifically, assets are items the company owns.
2. Add up your liabilities, such as accounts payable, salaries, and income tax and employee benefits payable.
3. Deduct your liabilities from your assets to arrive at your net income or equity. Because equity equals assets minus liabilities, it is sometimes called the company’s book value.
4. Confirm your calculation by adding liabilities to owner’s or stockholder’s equity. Examples of owner’s or stockholders’ equity accounts include common and preferred stock, and retained earnings, which is the net income shown on your income statement. The result should equal your assets.
- If the business is a sole proprietorship, the term “owner’s equity” is used on the balance sheet. If it’s a corporation, the term “stockholders’ equity” is used. Owner’s or stockholders' equity generally has credit balances on the balance sheet.