## Wednesday, February 6, 2008

### How to Calculate Net Income

The December 31, 2006 Balance Sheet of Business Card's Company shows Assets on the balance sheet of \$35,000 and Liabilities of \$23,000. During the year 2007, the company issued more stock for \$3,500, and paid dividends of \$800 to all shareholders. If the December 31, 2007 Balance Sheet shows Assets of \$43,000, and Liabilities of \$27,000, what must have been the Net Income for the year 2007?

Ending balance of each main account are given as follows (according to the accounting records in year 2006):

Asset = 35000
Liabilities = 23000

By using the accounting equation (A = L + E), we can find that Owner's Equity = 12000.

The ending balance for this company in 2007 shows:

Asset = 43000
Liabilities = 27000

By using the same method, Equity is calculated using the accounting equation A = L + E.
Equity = 16000

The question is to calculate Net Income.

Net income, dividends, stocks are all part of the owner's equity in the accounting equation.

OE beginning
+Net Income
+Common stock
-(Dividends)
= OE Ending

Calculate Net Income:

12000
+Net Income
+3500
-(800)
=16000

What is net income?

Answer:
Net income = 1300

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#### 5 comments:

Anonymous said...

i dont understand net profit can someone help me i read the whole thing HELP!!!!!!!!!!!

Anonymous said...

I need help. I'm trying to figure out net income.
Beginning of the year
Assets \$118,000 Liabilities \$50,587
End of the year
assets \$171,500 Liabilities 69,458
a. Owner made no investments in the business and no withdrawals were made during the year.
b. Owner made no investments in the business but withdrew \$650 cash per month for personal use.
c. No withdrawals were made during the year but owner invested an additional \$45,000 cash.
d. Withdrew \$650 per month for personal use and the owner invested an additional \$25,000 cash

Rashida [Panxpan] said...

Very nicely described how to calculate net income. Measuring business net income very essential to calculate whether business is having profit or lose. I like the formula used here. PanXpan is an easy to use tool thats pretty low cost. Its finance summary module helps users share and monitor their business expenses.

Shadhin Kangal said...

Double Entry system seeks to record every transaction in money or money’s worth in its double aspect – the receipt of a benefit by one account and the surrender of a like benefit by another account, the former entry being to the debit of the account receiving the later to the credit of the account surrendering.

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