Net income is equal to the income that a company has after subtracting costs and expenses from total revenue.
Revenue - Expenses = Net income (loss)
Net income is informally called the "bottom line" because it is typically found on the last line of a company's income statement.
Balance sheets and income statements are interrelated through the retained earnings component of owners' equity.
Ending retained earnings = Beginning retained earnings + Net income - Dividends
The following expanded accounting equation, which is derived from the above equations, provides a combined representation of the balance sheet and income statement:
Assets = Liabilities + Contributed capital + Beginning retained earnings + Revenue - Expenses - Dividends
- Dividends and expenses decrease owners' equity.
- Revenues increase owners' equity.
Because dividends and expenses are deductions from owners' equity, move them to the left side of the equation: